Evolution Of A Bullish Risk Rocket (GLD)

Since highlighting gold’s breakout in April’s Time to Shine post, we’ve seen the precious metal surge up to $1250 and subsequently fall back to its breakout point. Those familiar with technical analysis 101 know that prior resistance often becomes new support. The price action of the SPDR Gold ETF (NYSE:GLD) over the last month serves as one such example of this basic tenet (click any image to enlarge).

 

To take advantage of last week’s textbook bullish retracement pattern, suppose we entered a bullish risk rocket on May 21st by purchasing 100 shares at $115.90 and two June 121 calls for $1.55 apiece.

As mentioned in previous risk rocket discussions, the initial target for the stock is a mere 1 ATR. With last Wednesday’s gap we would have been able to sell the stock around $118.50 for a $260 profit. This gain reduces the risk on the two call options from $310 to $50. Traders still aggressively bullish on (NYSE:GLD) may opt to simply hold onto the long calls and find comfort in the fact that their remaining risk is a small $50. Those with a less aggressive outlook wanting to further diminish the risk involved may consider rolling the calls into some type of spread. As illustrated in the Decision Tree post, potential choices may include bull call spreads, ratio back spreads, butterflies and condors. For (NYSE:GLD) I elected to roll into a bull call spread by selling 2 Jun 124 calls for $.91 apiece.

Due to the $182 credit received from the short calls, our remaining risk is eliminated and we now stand to gain $132 minimum reward. Best case scenario occurs if (NYSE:GLD) resides above $124 at June expiration. By expiring in-the-money, our call spread will realize it’s full profit potential. Within the decision tree displayed below we are currently in T2. Depending upon how (NYSE:GLD) performs over the next few weeks, we may think about making one last adjustment into a butterfly or condor by adding a bear call spread. It really comes down to whether there is sufficient premium in the out-of-the money calls to make it worth our while.

Written By Tyler Craig From Tyler’s Trading

www.tylerstrading.com


Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil.  They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF options for your viewing below:              

LONG:              

The investment SPDR Gold ETF (NYSE: GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.              

The investment ETF (NYSE: GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.              

The Funds ETF (NYSE: GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”              

The objective of ETF (NYSE: SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.              

The investment ETF (NYSE: UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.              

The investment ETF (NYSE: DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.              

The investment ETF (NYSE: DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.              

The objective ETF (NYSE: IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.              

SHORT:              

The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.              

The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.

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