As developed nations continue to turn to quantitative easing as the first line of defense against economic malaise, currency alternatives such as gold and silver have apparently reached a bottom.
Since trading at $1798.10 in October 2012, gold futures contracts have traded in a bearish pattern, reaching a low of $1,130.40 last November. From September 2014 until very recently, the commodity appeared to be somewhat range-bound (much like the broader market).
In 2015, however, the commodity has seemingly turned a corner, moving higher in 10 of 17 sessions this year. With Draghi and the ECB”s recent announcement to implement their own version of QE (€60bn per month for one year), traders can expect gold to continue its bullish trend at least in the short-term.
Trading futures and options on futures is capital intensive can be capital intensive, so I turn to the SPDR Gold Shares ETF (NYSE: GLD, $124.31), currently up around 9.5% thus far in 2015.
The GLD Mar 124 Straddle is trading $7.00, implying roughly a 5.6% move to either side in the 52 days to March expiration.
When setting up spreads, I always try to align my price target with the move being implied by the at-the-money straddle, while looking for a risk/reward ratio of at least 3:1.
My Trade
- Buy the GLD Mar 128-131 Call Spread for about $0.75
- Risk: $75 per 1 Lot
- Reward: up to $225 per 1 Lot
- Break-even stock price (at expiration): $128.75
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