Thursday, September 27, 2012

Fade the Gold Pop With GLD Options

Tuesday�s surprise market rally brought good tidings and cheer to beleaguered bulls who were in desperate need of a holiday pick-me-up. Unfortunately, the majority of the rise took place overnight. This means that unless you jumped in sometime during Monday�s bloodbath, you likely missed the move.

Along with the rise in equities, money also found its way into gold as SPDR Gold Trust (NYSE:GLD) rose 1.36% on the day. Despite the recent three-day run in GLD, it remains in a downtrend below its 20-, 50- and 200-day moving averages.� Consequently, this may be a low-risk opportunity to initiate bearish-type trades.

One play worth consideration is the selling the GLD January 163-168 bear-call spread.� To enter the position, you would �sell to open� the $163 call while �buying to open� the $168 call for a net credit around 80 cents. The exact prices you pay/collect for each option don�t matter (although prices that work are collecting $1.30 for the $163 and paying 50 cents for the $168), just as long as you enter the trade in the 80-cent (credit) area.

This bearish vertical spread offers a high-probability, limited-risk avenue for betting GLD will fail to rise above $163 by January expiration.� The maximum reward is limited to the initial 80 cents received at trade inception, which will be captured as long as GLD remains below $163.� The max risk is limited to the distance between strikes ($168 – $163 = $5) minus the net credit ($5 � 80 cents = $4.20), and will be incurred if GLD rises above $168 by January expiration.

The rally in GLD may continue for a few more days before a new wave of selling takes hold.� As such, I would wait for a break of the prior day�s low before pulling the trigger on the bear call spread.

Source:� MachTrader

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

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