This has been a whipsaw year for the stock market. It all started in February with a overly hot wage inflation report that started an equity correction. But then stocks got caught up in a storm of tweets, launching a global tariff war from the U.S.
President Trump is trying to strike better deals between the U.S. and its trading partners. And the rhetoric has been nasty, where nations are engaging in tit-for-tat threats of escalation. The U.S. has already levied billions of Tariffs and partners have responded in kind. More are on schedule to hit in the next few days. Nevertheless, the stock markets are green and have set new all-time highs despite all the booming uncertainties.
The same cannot be said for gold. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) is down 9% year-to-date; whereas, the S&P SPDR S&P 500 ETF (NASDAQ:SPY) is up 8% and the PowerShares QQQ Trust ETF (NASDAQ:QQQ) is up 15% for the same period. This makes no sense except for the fact that a massive run in the U.S. dollar has put extreme downside pressure on gold and all commodities prices in dollars.
Over the long-term, gold prices should be rising, which is all in favor of the GLD ETF. This is an asset that people crave. It is rare and getting harder to find, so its value over time should climb.
Technically, the daily charts show an unrelenting descending trend. But for the first time in a while, there are some signs of stabilization on the weekly charts. This usually is the first step of a rounding bottom, which should precede a recovery rally. And therein lies the opportunity.
But to be safe, I don’t want to simply buy GLD shares and hope for the best. Instead, I use options where I can limit the out-of-pocket expenses now and still participate in the upside of gold.
How to Trade the GLD ETF Today
I implement my strategy with a pair trade, where the first trade profits from selling downside risk against potential support levels. The second would be to buy upside hopium to capture the move higher. If the GLD ETF rises, then I am long for free.
As long as the GLD price stays above my puts, then any premium I recover from closing the GLD ETF calls would be incremental profits.
There are risks, so I will set tight stops on this. The U.S. dollar may continue to be strong. The U.S. is still in a rate-hiking phase; whereas, the rest of the world still maintains its loose money policies.
Just yesterday, the ECB’s Mario Draghi reiterated that he will keep his Quantitative Easing going through the end of next year. So the dollar is likely to remain king for now. There are some technical difficulties on the U.S. dollar chart, but those alone are not a guarantee that it’s done rising like it has been.
The upside hopium: Buy the GLD Dec $117/$119 debit call spread for 40 cents per contract. This has the chance to quadruple in value if the price of GLD rises above both legs by year-end.
To mitigate my out of pocket risk, I sell downside risk for credits.
The potential bank: Sell GLD Jan 2019 $107 puts and collect 60 cents to open. Here, I need the price to stay above my strike so it can expire in my favor. Those who want to mitigate this risk can buy the $105 leg below to make it a bull put spread instead.
I am not required to hold my trades open through expiration. I can close any of them at any time for partial gains or losses.
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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.