Fundamentally, Gold is rare and getting more difficult to mine. Furthermore, demand for the precious metal is never waning. So in theory it should only go up over the long term.
I prefer to take the long bets on gold, so it’s a matter of finding the proper entry points. I am not one to usually wait for the perfect sign, but this week I was waiting for a little more downside to load up long gold.
The reaction on Wednesday foiled my perfect setup.
Since I am using the options markets, however, I can still implement my trading strategies. Today, I am sharing three trades to benefit from a rally in gold.
Profitable Trades on Gold Stocks: SPDR Gold Trust ETF (GLD)
Click to Enlarge SPDR Gold Trust (ETF) (NYSEARCA:GLD) has been choppier than it should be, but I can still find levels against which I can sell risk. I want to go long GLD, but not by chasing a price target. Instead, I will sell downside risk against proven support.
The Trade: Sell the GLD Sept $106 put. This is a bullish trade for which I collect $1.10 to open. There’s a 90% theoretical chance of success by having GLD close above the strike price. If the GLD stock price falls below it, though, you’ll be committed to buying GLD shares at $106.
For milder risk profiles I can modify this trade into a Sept $106/$104 credit put spread and still yield more than 20% on risk.
Profitable Trades on Gold Stocks: Market Vectors Gold Miners ETF (GDX)
That means that it also captures the current equity markets’ animal spirit. This may lend support to the GDX if gold itself encounters pressure, say, from a rising U.S. dollar.
The Trade: Sell the GDX Sept $17/$15 credit put spread and have an 85% theoretical chance to yield 15% on money risked.
Usually, I like to hedge my bet by selling opposing risk, but I will opt out in this case. Technically, GDX looks like it’s about to break out. If the lower-high trend line is breached, it could invite more technical buyers. The bulls will then try to retest $28 per share.
Profitable Trades on Gold Stocks: Barrick Gold (ABX)
Click to Enlarge So in addition to the GLD long and the bet on gold miners as a whole, I want to add risk into a specific gold mining company. I chose Barrick Gold Corp (USA) (NYSE:ABX) because of its decent fundamentals and technical promise. I will sell downside risk here, but also invest that into upside promise.
The Trade: Buy the ABX April $20/$21 debit call spread. This is a bullish trade for which I risk 20 cents to open. I need the ABX stock price to rise through my spread by mid-April. To mitigate out-of-pocket risk, finance the bet by selling downside risk against levels that have been defended recently.
The Bank: Sell the ABX July $15/$14 credit put spread with 85% certainty of yield 15% on risk. As long as ABX stock stays above my sold spread, any premium I recapture from selling my debit calls would be mostly profits.
Selling options can be risky, so never risk more than you can afford to lose.
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.