It’s difficult to pinpoint a specific reason that tech sold off so dramatically on Monday, but the sector still looked soft yesterday.
This may turn out to be a good opportunity for traders to open a new position in Microsoft (NASDAQ:MSFT), but we recommend giving the market another day or two to settle before making any final decisions.
Instead, we’re recommending you look at selling a put write on the SPDR Gold Shares ETF (NYSEARCA:GLD).
Taking the Risks Seriously
Mondays selling looked like short-term profit-taking to us. Prices have been very correlated lately, so a short-term reversal that happens all at once isn’t unexpected. Traders are justifiably concerned that the market may have difficulty making further gains while infection rates continue to rise.
Frankly, we agree that this is a risk people need to take seriously as they manage their portfolios.
The U.S. reported a record 67,400 spike in new cases yesterday, and the average new cases per day are over 62,000. That’s more than triple the average from a month ago. At this point, the economy seems like it could take another hit regardless of whether states start to shut down again or not.
Exposure to gold will give traders some additional diversification, and we don’t see any fundamental reasons demand for gold would drop in the near term. Investors seek gold and bonds as a holding when interest rates are low and uncertainty is high, and we don’t expect either condition to change this summer.
GLD is Stalled, so This is the Time to Sell
In the chart below, you can see that GLD is running into resistance at the $170, but it will likely keep heading higher as risk continues to build. We want to capitalize on this pause before it heads higher.
Daily Chart of SPDR Gold Shares ETF (GLD) — Chart Source: TradingView
The ETF has support at its old resistance level around $165, but we’re not sure traders can collect a decent premium by selling a put with a strike at that level.
There are two options for generating more premium: selling a put with a later expiration or selling a put with a higher strike price.
We think selling a put with a higher strike price with a closer expiration date is a better option. Looking about halfway between support and resistance will give you a good range.
From a technical perspective, any strike price above support means you may see some excursions beyond that level. However, we think the premium available justifies the risk/reward of the position.
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.