Gold received an influx of buying in response to the Jan. 25 Fed announcement.  The surge in demand was sufficient to push the ever-popular yellow metal above its 50-day moving average and back into an intermediate uptrend.

If you missed the initial breakout and you’ve been stalking gold for another opportunity, we may be seeing it right now.  The sell-off that began on Friday and has thus far followed through on Monday may be providing a low-risk entry point.

While the current pullback may yet continue for a day or two, those looking for the SPDR Gold Trust (NYSE:GLD) to continue its uptrend should be treating the current dip as a buying opportunity.  One option strategy worth consideration is the bull-put spread.

The bull-put spread (also known as selling a put spread, or a put credit spread), consists of “selling to open” a higher-strike put while “buying to open” a lower-strike put in the same expiration month.  This vertical spread is entered for a net credit which represents the maximum reward available in the trade.  Typically, traders use out-of-the-money options when initiating the position.

If you’re looking for continued upside in GLD, you could sell the GLD March 159-154 put spread for around 72 cents a share ($72 a contract).  The spread is entered by selling to open the GLD March 159 Put while at the same time buying to open the GLD March 154 Put.

Prices that work right now are selling the $159 strike for $1.32 and buying the $154 strike for 60 cents. The exact amount of credit you receive from the March 159 Put or the amount of debit you pay for the 154 March Put doesn’t really matter, so long as the net credit comes out to 72 cents.

The max risk in the position is limited to the distance between strike prices minus the net credit.  If the March 159-154 put spread is sold for 72 cents, the max risk would come out to $4.28 (i.e., the difference between the strikes, or $5, minus the 72-cent credit).

Source:  MachTrader

At the time of this writing Tyler Craig had no positions on GLD.