GLD: Make 5x Your Money In 2 Weeks On A Further 4.5% Decline

by Dan May 9, 2011 7:55 am • Commentary


SILVER and GOLD had a heck of a week last week with their etf’s garnering much of the spotlight in the equity markets……SLV plunged 25%, while GLD saw a more orderly decline down ~4.5% from all time highs.  The Volatility reminded me of the lyrics of a very cool U2 song from the 80s aptly titled, you guessed it, Silver and Gold:

The temperature is rising
The fever white hot
Mister, I ain’t got nothing
But it’s more than you got……

That’s probably what it felt like if you were one of the last ones to enter the retail driven furious rally that saw it’s crescendo about 6 trading days ago.

Both commodities are looking up this morning with SLV up almost 6% and GLD up about 1%, nothing really fundamental here other than the fact that the US$ is down 50 bps vs the Euro, slightly reversing it’s fairly violent late week move off of it’s 52 week lows.

Friday on Options Action we talked commodities, and I offered a short term bearish trade on GLD that breaks-even if the stock is down ~2.5% from Friday’s close of 145.30 with gains capped down about 4.5% at 137.

See video here:  go to 4:30 in video for the GLD trade.

TRADE EXAMPLE: Stock is up a little more than ~1% this morning to about 147, so will update after the open, possibly with new strikes.

-But as of Friday’s close of 145.30:

BUY GLD (stock ~147) MAY 144/139 Put Spread want to buy it for .70
-Buy GLD May 144 put for .90 and
-Sell GLD May 139 put at .20

Break-even on May expiration:
143.30 on downside
btwn 143.30 and 139 make up to 4.30
below 139 make all 4.30

WORST CASE: stock is above  144 and lose all .70 in premium you paid, btwn 144 and 143.30 lose up to .70

TRADE RATIONALE: The volatility in both of these names, while fairly extreme relative to their gradual march higher over the last few months, is not likely to subside just like that after last weeks action.  Friday’s stabilization day and this morning’s bounce could be a good opportunity to take some profits on some late week positioning for a bounce (see my SLV May13 weekly call butterfly suggestion late Thursday afternoon here) or to make outright bearish bet.  My guess would be that SLV will see another test of last weeks lows and then settle into a new range and base for a bit.  I have to assume that there is a fairly sizable group of speculators who will not be a allowed to play due to increased margin requirements and lack of funds, which could actually cause the calm.

-GLD positioning is definitely a bit less speculative than the SLV trade as it is widely owned stock among large hedge funds and institutional money managers.  But that fact alone is one of the reasons I want to make this short term play in GLD reversing earlier suggestions from March and early April to Buy Call Spreads……If large holders start to head for the door just to trim positions, even in an orderly fashion, I expect GLD to work its way back to the 138/139 level where it spent weeks basing before the latest breakout to new highs.

-While I still believe the longer term trend is up, I think in light of last weeks action a further reset back towards support would be a healthy thing for a sustained longer term move…..I like the risk reward of a slightly greater than 5 to 1 payout in 2 weeks if etf pulls back to support.

[caption id="attachment_1611" align="aligncenter" width="452" caption="GLD 6 month chart Provided by LiveVol Pro"][/caption]