Today, I’m returning to the gold mine to see if Lady Luck might favor us once more. Per the usual disclaimer, this isn’t a recommendation. Just an intellectual exercise to help stretch the mind and keep your smarts sharp.

First, feast your eyes on the chart.

I see a nice uptrend, complete with rising 20-day, 50-day, and 200-day moving averages. Last week’s breakout over $134 resistance saw a volume surge confirming buyers were swarming. The so-called accumulation day adds validity to the break and increases the likelihood that subsequent dips get bought.

While Friday’s high volume down day should give us some pause, I’m not sure it’s enough to warrant betting against the uptrend. Furthermore, we’ve seen this movie before (July 1st) and last time it ended with trend continuation, not reversal.

An upside trigger, like breaking a previous day’s high, would be desirable to confirm buyers are entering the fray. But let’s talk about strategy selection.

I think a scaling bull put strategy might work. Let’s walk through it.

Scaling Bull Puts

The rationale for using a bull put is simple. GLD has high implied volatility, thus increasing the appeal of short premium strategies. And its $134 price means the cost for naked puts will be too high, thus killing the ROI. So, bull puts are the better alternative.

As for the scaling part, well, I think GLD could pull back further before moving higher, and I’d like to use that to my advantage. So instead of entering with a full position, I’ll start with a partial and add size into weakness.

With August approaching three weeks to expiry, finding enough premium far OTM is tough. So, we’re using September expiration. The Sep $130/$127 bull put should do the trick. It currently trades for 51 cents.

3 Tiers

Suppose I can sell three contracts. Instead of selling all of them right now at 51 cents, I’m going to enter one now and leave the door open to adding a second and a third at 1.5x and 2x the original premium. Like so:

Tier One: Sell 1 Sep $130/$127 spread @ 51 cents

Tier Two: Sell 1 Sep $130/$127 spread @ 76 cents

Tier Three: Sell 1 Sep $130/$127 spread @ $1.02

To allow for quicker exits one each tier, I’ll use different profit targets as well. With a target of around 11 cents on the first tier, my profit would be 40 cents. I’ll shoot for a 40 cent target and the 2nd and 3rd tiers as well.

Tier One: Sell 1 Sep $130/$127 spread @ 51 cents, Target: 11 cents

Tier Two: Sell 1 Sep $130/$127 spread @ 76 cents, Target: 36 cents

Tier Three: Sell 1 Sep $130/$127 spread @ $1.02, Target: 62 cent

It’s possible to preset all three tiers and the target for the first tier. However, I can’t preset the target for the 2nd or 3rd entry until I actually get filled on those. So I might set up the order like this:

Let’s call it a day, shall we? Here’s my summary. Gold is in an uptrend with high implied volatility. I want to get long into weakness. I’m not sure if the dip will keep dipping. Scaling into bull put spreads allows me to use further weakness and any subsequent volatility to my advantage.

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