Like the Energizer Bunny, the rise in gold prices seems to keep going and going and going.  While the precious metal has experienced the occasional correction, each has been relatively shallow and short-lived.  Rather than being the result of some mass liquidation seizing the precious metal, these retracements have come as a result of mild profit-taking.  The current bout of selling pressure in the gold space may be setting up yet another in a long line of buyable opportunities.

One of the more popular option plays when anticipating a resumption of the uptrend is selling puts. By doing so, traders obligate themselves to purchase shares of the underlying stock at the strike price.  For example, with the SPDR Gold Shares (NYSE:GLD) exchange-traded fund currently trading around $170, we could sell the Sept 160 put option for $100.  If GLD remains above $160 by September expiration, the put will expire worthless, allowing us the ability to pocket the entire $100 profit.  On the other hand, if GLD drops below $160 we will be obligated to buy 100 shares of GLD at a cost basis of $159.

But selling GLD puts also requires a large capital outlay, due to the high price tag of the underlying ETF.  A better alternative would be to sell a put spread.  Because the spread offers a limited risk profile, the capital required is lower and the potential return on investment is higher.  As a general rule, I favor selling put spreads over straight naked puts on stocks over about $60.

Instead of just selling the Sept 160 put outright, we could create a spread by simultaneously buying the Sept 155 put.  At a current price of $60, the Sept. 160-155 put spread is offering a $60 reward and $440 risk.  Selling put spreads has been, and I suspect will continue to be, a cheap way for option traders to exploit the rise in gold prices.

Source:  MachTrader

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