Gold has been in a technical breakout that has rewarded bulls since mid December. The fall in the U.S. Dollar left the door open for this spike. But according to my charts, gold may have already run too far. So to start chasing upside from this point could be reckless. This is not the same as saying it’s time to short gold, but rather that there might be better entries long.
Having said that, there are other ways to still go long gold and using the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEARCA:JNUG) is one of them. Today, I want to go long this group of stocks by betting on support. Since this is a group of stocks, they should hold up well even if gold corrects a bit in early 2018.
Consensus is that stocks will continue in this coming year just as strong as 2017, especially the small caps. The macro environment remains just as exciting, especially that we now have a new U.S. tax plan. Experts are convinced that small-cap companies should benefit best so JNUG should also do well.
Instead of buying JNUG stock and hoping for a rally to profit, I will bet that the bulls will buy the dips for weeks to come. So I will sell downside risk into proven support, then let time do the rest. If prices hold up above JNUG support, then the positions I open will expire in my favor for maximum gains.
The fundamental thesis behind gold is simple. The stuff is rare, hard to extract and we love it. So over time, its value should survive all dips. Using options allows me to trade its trading vehicles like JNUG to profit from the short-term ranges.
Today’s set up is an attempt to profit from the short-term trading range in gold and JNUG, which is directly impacted by its price move.
Two JNUG Trades
The Trade: Sell the JNUG Jan 26th $15.50 put for 50 cents per contract. This is a bullish trade that has an 80% theoretical chances of success. If it does not succeed, I will accrue losses below $15. If I want to mitigate the risk of selling naked puts I would sell the $15.50/$14.50 put spread where I risk less money but still yield 15%.
To mitigate the risk, I can balance this bullish risk with some bearish balance. I can optionally sell a credit call spread, but since leveraged ETFs can be tricky to short, I will use the SPDR Gold Trust (ETF) (NYSEARCA:GLD) for balance. JNUG and GLD tend to move in tandem. I will delay entry in this hedge side until I see abatement in this ongoing gold price rally.
The Optional Hedge Trade: Sell the GLD Jan $127/$128 bear call spread where I collect an additional 15 cents per contract. Here, I need the price to stay below my strike so I can yield 15% on risk. I am not obliged to hold either trade through expiration. I can close either for partial gains or losses.
Ultimately, 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.