Hey traders, Jeff here with a quick post documenting a call spread I’ve set up on the Gold ETF (GLD). I’ll try to display all the details in the shortest format possible.
Ok, lets start with the chart…
GLD Live Chart 5-1-17
Analysis
Before I begin, let me point your attention to a quirk within this market, that may not be immediately noticeable. As price rises, volatility follows. Its directly correlated rather than inversely correlated, which is the case for most equities. Nothing ground breaking, just a simple truth about this market which consequently, lends itself well to the long call spread strategy.
Pros to the Long Call Spread:
- Increasing volatility could offset time decay
- GLD trading in an uptrend
- MACD above the zero line
- RSI nearing oversold territory
- Options market skewing premium to calls
- Possible bounce off 50 period moving average
- Volume decreasing as price moves lower
Cons to the Long Call Spread:
- Lower volatility cuts twice. Deflated premiums and no time decay offset.
- GLD trading in longer term range to slight down trending market.
- Price moved lower through the 10 and 30 moving average
Looks to me like a trade that can work. GLD has pulled back and may be ready to continue the uptrend. Alternatively, it could start a new downtrend but we’ll wait to see.
Rationale
Overall equity market weakness generally means the gold markets will increase. Since GLD tracks the gold market and has plenty of options liquidity its a good vehicle to capture the expected move higher. With the S&P 500 failing to post a new high for nearly two months now, it appears the market is getting heavy. That said, I’ve believed this market was frothy for a year now but with no sustained downtrends have materialized.
In addition, I’m expecting GLD to find support at the 50 SMA line. It didn’t as the picture shows, but that was my logic when setting up the call spread.
Actual Trade – Long Call Spread
Aug. 18, 2017 GLD Option Chain
You can see I took a trade pretty far OTM and with more than 3 months until expiry. I did so because I thought GLD might flounder around the current level. The chart above shows a sharp move lower after entry so yes this trade is currently showing a loss.
I elected to initiate the long call spread based on a decreased volatility level. In hindsight, the short call spread may have been the quickest to success.
Total investment – $.41 or $41
Targets
All updates to this trade will be provided below.
Trading the Aug. 2017 strike means I’m prepared to hold this position for about 2 months. If price doesn’t move favorably in that time I’ll close with whatever loss has resulted. If price does move favorably I’ll look to close near 60% of max profit, or bout $36 of profit.
UPDATE
This trade was a success! My target profit was achieved and the trade closed profitably.
Only successful trades,
Jeff “the OptionBoxer”
