Today, I’m recommending a bearish naked call write on SPDR Gold Shares (NYSEARCA:GLD).
Last Friday, the S&P 500 erased all of its gains from Thursday. Investors were reacting to the recent U.S. airstrike on Iran, and they started pushing into safe-haven assets like gold for protection.
Gold is back to the $1,550 level after gaining about 1.3% following the attack. The dollar has been falling recently, which was already providing a tailwind for gold, but Friday’s action pushed it back up to its September highs.
Traders Hedging Against Inflation
If you look at the chart below, you can see that gold prices rose throughout last week. They actually started rising just after the Christmas holiday.
Daily Chart of Gold — Chart Source: TradingView
Just after Christmas, we received news that new home sales in the U.S. had risen, consumer confidence was high and the number of American’s applying for unemployment had decreased.
Low unemployment and high confidence typically leads to more spending. In turn, greater demand for goods and services tends to lead to inflation.
Gold, which can act as a hedge against inflation, reflect the market’s expectation for higher inflation in the future, so naturally it started to rise a little.
But the airstrike sent gold much higher, and I think the spike is unwarranted. Eventually it will start to fall back down.
How to Collect While Gold is up
GLD is an exchange-traded fund (ETF) that follows the price of gold. After the recent spike, the ETF jumped toward its recent high just above $146. That level will likely act as resistance, which should push prices lower.
Daily Chart of the SPDR Gold Shares (GLD) — Chart Source: TradingView
Still, resistance may not keep the stock from pushing higher. By setting a strike price more than $9 above GLD’s recent high, traders can lower their risk in this otherwise risky naked call write.
But ultimately, I think investor sentiment will calm, and gold will start to come back down as a result. If you recall, there was a spike in oil prices after the attack on the Saudi oil facility at Abqaiq in September. But prices did come back down after that attack.
The spike in gold is a result of fear, and I don’t think that fear is well matched with the fundamental conditions in the market. With a far out of the money call write, we can collect some additional income on GLD.
Sell to open the GLD Jan. 31st $155 Call for a credit of about $0.35.
Note: There are several January expirations available for GLD options. Be sure you are opening the weekly options that expire on Friday, Jan. 31, 2020.
This is a high-risk trade, so take a small position.
About Naked Call Writes
The calls obligate you to sell GLD at $155 a share if the stock rises higher than that by option-expiration day (Jan. 31). Selling these calls gives you $35 in your account per option contract. (Remember… one option contract equals 100 shares of stock.)
One risk is that GLD 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 if the stock moves up sharply is that the call will be assigned. This means that for every 1 call option we sold to open, we would need to buy 100 GLD shares on the open market at an unknown higher price and then sell the shares at the $155 strike price for a loss. Keep your positions small.
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