Recently, the shine has faded off the gold trade. Investors are now blinded by the lure of Bitcoin and other blockchain headlines. While this doesn’t actually affect the value of gold, it makes me feel old writing about the SPDR Gold Trust (ETF) (NYSEARCA:GLD).
As bitcoin gains popularity, gold fades into the background — but that doesn’t mean that it falls in price. The GLD ETF is up over 10% year-to-date.
No, I am not a bitcoin hater. I bet that gold saw similar criticism to what bitcoin is seeing now. To me they are very similar, so there is room for both to successfully exist.
The fact remains that as long as it is rare and people want it, gold should remain precious in value. And therein lies my opportunity.
I’ve been trading the GLD ETF as a proxy for gold for years. I go long it when people hate it. This year and when it spiked above $125 per share, I’ve also balanced some longs with cautious short positions. Today I want to set another bullish trade where I sell risk into what others fear. I will use GLD options where I can build room for error.
Since the real value of GLD is what we perceive it to be, I will rely on proven support levels to place my risk.
Technically, GLD has a tightening range this year. It is also approaching the limits of converging trend lines just above $120 per share. It is important to hold these trends else risk retesting $116 per share.
Click to Enlarge I’ve recently closed winning iron condors that I had working for months. So I come into this with profits in hand. Today I am only deploying bullish risk because we are in new all-time high levels in equities and if we are due for a correction soon, gold could spike as it still is a safe haven trade. So I will wait until January before deploying the GLD bearish trades to make my new iron condor.
GLD Stock Trade Idea
The Trade: Sell the GLD Apr 2018 $115 naked put. This is a bullish trade where I collect 75 cents to open. Here I have a 85% theoretical chance of success. But if the price falls below my strike then I accrue losses below $114.25.
Selling naked puts is daunting especially near all time high stock markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the GLD Apr 2018 $115/$110 bull put spread, which has about the same odds of winning and would yield 11% on risk. Compare this with risking $122 per share here and without any room for error expect a rally profit.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for GLD stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
