Gold’s easiest trades usually come to me when I take the opposite view of that of Wall Street consensus. Often this happens at extreme levels. Now, I have neither — there are no obvious views on gold and the levels are pivotal, but not extreme. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) is strong on a red market day.
My history trading the Direxion Daily Junior Gold Miners Index Bull and Bear 3x Shares (NYSEARCA:JNUG) is 50/50. I had one great win and one … well, less than great.
This trade setup will break the tie. Luckily I have some fresh profits from a long GLD trade, so I am entering this trade with some house money.
A Simple JNUG Trade
Click to Enlarge Buy the JNUG Feb $9/$10 debit call spread. This is a bullish trade for which I pay 35 cents to open.
I need JNUG to rally past my spread in the next 30 days for a chance to double my money. This would be a bet on the general markets, too. As long as markets in general don’t correct, miners should have some support from the equity uptrend.
Usually I like to hedge my bet by lowering my out-of-pocket expense. In this case, I will use a bullish setup on the GLD to hedge the JNUG trade.
I chose the GLD because it’s free of stock-specific issues. So if the markets in general fall then gold could catch a bid as a safe haven. Whereas the Market Vectors Gold Miners ETF (NYSEARCA:GDX) would likely have downside pressure as its components are stocks.
The Hedge (optional): Sell the GLD March $109/$108 credit put spread. This is a bullish trade for which I collect 13 cent per contract to open. I usually like to enter credit put spreads on red days, but I may not get the chance. This trade has an 85% theoretical chance of success and could yield 14% on money risked. I need GLD to stay above my strike sold through expiration.
The Hedge Twist: Usually I like a bigger buffer than 5%. So I could opt to sell the June GLD $105/$104 with the same metrics only with double the distance from current price.
I am not required to hold my trades through their duration. I can close any of them for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.