Gold Options Look Up
Gold Options Look Up
By:Tom Preston
But Fed inaction could keep it from falling too far. Here's a bullish strategy for traders.
- Gold has been glittering.
- Expected Fed inaction could limit how far gold will fall.
- We describe a bullish strategy.
These days, it would be hard to find something that glitters more than gold.
Last week, GLD, the ETF that tracks the price of gold, hit its highest price in over 20 years. The prospect of falling interest rates was pushing GLD higher, but it retreated a bit this week as inflation and rates ticked back up.
The probability that the Fed will keep rates unchanged over the next few Federal Open Market Committee (FOMC) meetings has risen, and that could keep GLD from falling too far.
GLD's IV remains high
GLD’s out-of-the-money (OTM) calls are trading over equidistant OTM puts, indicating that the market sees risk to the upside. That might be enough for a trader to consider a bullish strategy in it.
GLD’s implied volatility (IV) has dropped after falling off its high, but its 13% overall IV and 46% IV rank are still high enough to make its options good candidates for short premium trades.
A bullish strategy for GLD
If you think GLD might rally in the next few weeks, the short put vertical that’s long the 196 put and short the 198 put in the April weekly expiration with 42 days to expiration (DTE) is a bullish strategy. It collects a credit 1/3 the width of its strikes, has an 82% probability of making 50% of its max potential profit before expiry, and that generates $.35 of positive daily theta.
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Tom Preston, tastylive chief market strategist, is responsible for the brokerage’s trading strategy, client-facing trading software and futures trading products. He contributes to Luckbox magazine and writes tastylive's Cherry Bomb newsletter. He's been trading options since 1992.
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