Gold is the talk of the town this week, deservedly so. The oh so precious metal just popped to its highest level since 2013. At $1,421 per ounce, gold bugs are coming out of the woodwork for some old fashion chest thumpin’.
“Told ya gold was the best!”
“Twas only a matter of time before the slumbering beast awoke.”
“The glory days have returned.”
“Gold is the new crypto, son!”
Utterances of a smug gold owner
Anytime
From a technical perspective, gold looks its best since 2011. Chart watchers like to say, “the longer the base, the higher in space,” to reflect the extreme bullish implications when a stock finally powers through the ceiling of a lengthy consolidation zone. The base in gold was six-years in the making, and if this breakout is the real deal (volume certainly corroborates it), then we could be in the beginning innings of a long-lasting resurgence.
Bottom line: On the monthly and weekly time frames, it’s impossible not to be mega-bullish on the yellow metal here.
Gold Volatility
In the short run, however, gold may have become a little too hot to trot. Just look at how extended the daily time frame is right now. Overbought to the max. Sure, it could go higher, but some consolidation or a pullback is becoming increasingly likely.
Layer in the volatility characteristics and options trades start to become tempting. At 17%, IV has now rallied to the 100th percentile of its one-year range. In fact, if you look at the Index of gold implied volatility (GVZ), you’ll see we just tagged a two-and-a-half year high.
GLD options have finally risen to levels that make them tempting to sell.
As I see it, you have a few choices. Per the disclaimer below, these aren’t recommendations, but rather an intellectual exercise to show how a trader might try to structure risk around juicy premiums.
The Bull
“Overbought,
The Bear
So you consider yourself a contrarian, eh? Fading GLD at these lofty levels is undoubtedly attractive. Even the rosiest of breakouts eventually succumb to gravity, if only for a spell.
Any time I look to go bearish with overbought stocks boasting high implied volatility, bear call spreads are my go-to. Maybe you sell the July $138/$141 bear call for around 50 cents and look to take profits during GLD’s next retracement.
Switzerland
Maybe you find betting against such a powerful breakout distasteful, but you’re unwilling to chase after such a torrid three-day run. You could sidestep the directional question altogether and make a pure play on volatility instead.
Sell an iron condor. You could go far OTM high probability or go for a bigger payday. An example of the latter is selling the July $138/$141 bear call and $131/$128 bull put for a total net credit of $1.15. Because the reward to risk ratio is somewhat balanced ($1.15 reward vs. $1.85 risk), you don’t need to exit at the short strikes. You could manage with a loose leash to allow GLD ample room to return to the profit zone between $138 and $131 in a few weeks.
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