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A few months ago, I was expecting to see the market rise into the end of the year. December is typically a bullish month, but that has obviously not been the case this year.
In fact, this has been the worst December performance for the stock market since 1931.
The most recent interest rate hike by the Federal Open Market Committee (FOMC) certainly didn’t help. The Fed announced last Wednesday that it decided to raise the federal funds rate by another quarter-point to a range of 2.25%-2.50%.
I was shocked to find out that there are roughly 700 economists working at the Fed, but I am unfortunately not surprised that they are all getting it so wrong.
The Fed has a tendency to overdo it with its monetary policy, and I think it is tightening too much and too quickly right now.
The Fed forecasted that only two additional rate hikes would be necessary in 2019 — down from three previously — but I would say that no additional rate hikes are necessary next year.
The market’s decline should be sending a signal to the Fed that everything is not alright with the economy, but it just doesn’t seem to be listening or paying attention to the right economic data.
While I do think we are due for a bounce from oversold conditions, the trend is certainly to the downside right now.
Therefore, I am recommending a play on a defensive commodity that investors often turn to as a safe-haven during volatile times: Gold.
And to play a bullish move in gold, I want to use the SPDR Gold Shares ETF (NYSEARCA:GLD), an exchange-traded fund (ETF) that tracks the performance of gold.
Daily Chart of SPDR Gold Shares ETF (GLD) — Chart Source: TradingView
As you can see in the chart above, shares of GLD really began to rise as the market started to fall back in October.
After a brief consolidation in November, GLD is rising again, and it has just broken through its 200-day moving average to the upside.
Regular readers know that a moving average (MA) is simply the average price of a security over a specific number of trading sessions. Moving averages can be long term in nature or short term in nature. Traders often look at 50-day and 200-day moving averages for clues about market direction.
After that breakout, I expect GLD to continue rising. Here’s my recommendation to play the move:
Using a spread order, buy to open 1 GLD Jan. 18th (2019) $120.50 call and sell to open 2 GLD Jan. 18th (2019) $124 calls for a net debit of about $0.32.
A ratio debit spread is simply a way to lower the cost of buying options, as the two options that you sell to open (short) help offset the cost of the option that you buy to open. Therefore, this ratio call debit spread is a way to lower the cost of establishing a bullish call option trade. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a ratio debit spread; contact your broker directly for specific requirements.
Because you are short a naked call in this ratio call debit spread, one risk is that the underlying stock could unexpectedly move up sharply. If that happens, we would need to buy back to cover and close the naked call option for a loss.
The other risk due to the naked call is if the stock moves up sharply the call could be assigned. This means that for every 1 call option we sold to open (shorted), we would need to buy 100 GLD shares on the open market at an unknown higher price and then sell the shares at the $124 strike price for a loss. So, this is inherently a higher risk play. Keep your positions small.
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InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.