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Diversifying Your Systematic Risk with Gold

Collect income from investors' hedging

Investors turn to gold as a safe haven during times of global uncertainty because it’s a globally valued asset. With a put write on SPDR Gold Shares (NYSEARCA:GLD), options traders can take advantage of investors’ latest push into precious metals.

The S&P 500’s volatile reaction to the accelerating spread of the Chinese coronavirus has been a case study for the concept of “systematic risk” on Wall Street.

Systematic risk, broadly speaking, is the risk that is inherently part of investing in the stock market. This is different than “unsystematic risk,” which is the risk that comes from investing in a specific stock.

While concerns over the coronavirus are certainly impacting some stocks more than others, the impact these concerns are having on global-trade expectations has ramifications for the entire market.

We expect the volatility we’ve experienced this week to continue in the near term.

In response, we are recommending a trade to diversify your portfolio a little bit, and we think that gold is the perfect diversification asset at the moment.

Traders Were Already Hedging Before the Outbreak

As mentioned above, traders turn to gold as a safe-haven investment during global uncertainty. Everybody appreciates and understands gold, and more and more investors are making it a part of their portfolios.

Interestingly, the value of gold has been rising since mid-December, even as stock prices have been soaring higher. This tells us that traders around the world are hedging their bullish equity portfolios with gold.

Selling a put write on GLD doesn’t just take advantage of coronavirus related uncertainty. It also benefits from general uncertainty around the post-Brexit European economy, weakness in Europe and a reluctantly dovish Federal Reserve.

The Bullish Cup-with-Handle

In the chart below, you can see how GLD broke out of a bullish “wedge” continuation pattern in mid-December. That’s when it started following the broader market higher.

Daily Chart of SPDR Gold Shares (GLD) — Chart Source: TradingView

GLD appears to be on its way to forming a bullish “cup-with-handle” continuation pattern. If it can hold above $147 and then break up through resistance at around $148.50, it will complete it.

We think $147 would make a good strike price for a put write because it lines up with the resistance level that formed on Sept. 4, 2019. That level also held GLD down in mid-January while it was forming the “cup” portion of its current pattern.

We think $147 will act as support in the short term. Old resistance becomes new support.

When looking at an expiration date, consider how long the volatility related to the coronavirus will last. The effects of outbreak scares fade as news coverage does, so it’s better to keep your trade duration short.

We recommend choosing a February expiration that provides a decent premium.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/diversifying-your-systematic-risk-with-gold/.

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