When is the last time you purchased a plot of land in Alaska, bought all the tools required and spent thousands to dig for gold? Exactly what I was thinking…not since last April, right?!?! (That’s my sarcasm coming out!)
What if you had the opportunity to make a great return on gold right now, minus the digging, sweat and months of hard labor? What if you only had to wait a few days to see this return? And what if you could do it without spending the capital required to buy hundreds of shares of stock? Below are the details for a very high probability trade with limited risk. I am referring to the mighty credit spread trade.
THE SET-UP
The SPDR Gold Trust ETF (GLD) has been in a wedge pattern since about June 2012. (I have outlined this in blue in the chart below). On August 8, GLD gapped out of the wedge pattern with great volume and triggered my bullish trade at $158.21.
We had a strong bullish move last Friday, with the low of the day bouncing off of the 200 -day simple moving average, represented by the heavy red line in the middle of the example. This suggests bullish continuation since we closed well above my downward trend line, also with good volume.
To further confirm the bullish move, we have a textbook flag pattern, highlighted in light red, complete with declining volume. The green box represents the area in which I would consider a Bull Put Spread.
HIGH PROBABILITY
This spread is below your 200-day simple moving average (the red line). GLD is now making higher highs and higher lows, confirming a bullish trend. The spread can also be below the low of the August 31, where there is obviously buying pressure.
Your spread could expire either on the 14, 21 or 28 of September. You would want to keep it less than three weeks so the Theta on the options can do its job and erode quickly. If you choose the 160/159 Bull Put Spread expiring on the 28 of September, you would be looking at a 22% return on investment. That’s likely much higher than your mutual fund or 401K has generated so far in 2012.
RISK MANAGEMENT
My risk management for this trade would be to close entirely if GLD closed below $160.00. This trade is entirely profitable for you if GLD does any of the following three things: continues bullish, trades sideways, or stays above 160.00 by Sep 28.
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