Gold is a globally sought-after precious metal. While investors may buy it for financial safety, others buy it for the love of shiny things. It is an important status symbol to large populations of our globe. My favorite way to trade gold is to use SPDR Gold Trust (ETF) (NYSEARCA:GLD). The GLD options are liquid while the underlying security tracks gold prices. The GLD ETF provides me with easy entry and exit points at any level.
Gold is becoming exceedingly more difficult to mine. Something this precious and which is becoming harder to get is by definition a long-term buy. So in theory, the gold fundamentals never deteriorate. Yet Wall Street sporadically sells it down hard.
Case in point, investors sold the GLD ETF down as much as 20% within the past 12 months. They have since recovered half, but for a fundamental story this stable, I deem this action too volatile. But therein lie the opportunities.
Click to Enlarge When the price action sways too far in either direction, I sell risk against the momentum to generate income. I mostly prefer doing it on selloffs, but I also occasionally short it too, if only as a hedge. Today and since GLD has fallen about 5% in a couple of weeks, I will sell some put risk against this recent malaise. Here is a recent example that delivered free profits out of thin air.
There is the worry from the U.S. dollar. Since gold is denominated in dollars, so if the dollar rises, it puts downside pressure on gold.
The dollar has been under severe pressure, so if it finds its footing and rallies, then there could be more downside for GLD just based on the currency price action. So I have to account for that potential when I choose my GLD levels.
GLD ETF Trade Idea
The Bet: Sell GLD Dec $109 naked puts and collect $1 per contract. In this bullish trade I have a 90% theoretical chance that I will keep my premium for maximum gains. But if Gold falls below my strike then I own GLD shares and could suffer losses below $108.
Usually I like to sell opposing risk for balance. But given the size of the buffer, I will delay such entry for now. I realize that selling naked puts is dangerous and isn’t for all investors. So I can accomplish the same goal but by using put spreads instead.
The Safer Bet: Sell GLD $109/$107 bull put spread where I have about the same chances of success but with limited risk. Yet the spread still could yield 13%. Compare this with risking $119 to buy the GLD and with no room for error hope it rallies 13%.
Selling options is risky business, so I never risk more than I can afford to lose.
Learn how to generate income from options here. 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.
