Gold Gone Wild: 2 Ways To Play A Pullback

by Dan August 3, 2011 2:12 pm • Commentary

If you think the market could rally off of a very oversold condition into Friday’s jobs report then you may want to take a shot shortiing GLD as it has rallied 3% this week alone to all time highs……

I get all the reasons why investors and central banks want to be long gold, but seems like near term seems like a fairly crowded trade….I want to make an outright bearish bet that GLD pulls back 3-5% in the next couple weeks……In a name like GLD I want to express this view with options in an effort to define my risk, if the market turns back down and the SPX heads towards 1200 this thing could be at 170.

TRADE:  GLD at 161.74 I bot the Aug 160/156/152 Put Fly for .65

-Buy 1 GLD Aug 160 Put for 1.85

-Sell 2 GLD Aug 156 Puts at 1.50 (.75 each)

-Buy 1 GLD Aug 152 Put for .30

Break-Even On Aug Exp:

Loses: above 160 lose .65 premium, btwn 160 and 159.35 lose up to .65, below 152 lose .65

Profits: btwn 159.35 and 156 , make up to 3.35, 156 make full 3.35 and profit trails off btwn 156 and 152.

-Technically the chart could pullback to the low end of the flag that formed before the most recent break-out…..that is how i chose the 160/156 strikes….

7 Month GLD chart from Bloomberg


OR Longs should consider collaring their Stock.  Buy Put Spread Collars

TRADE 2 Against Long Stock at 161.74 Sell the Sept 170 Call To Buy the Sept 160/154 Put Spread for .50

-Sell the Sept 170 call at 1.45

-Buy Sept 160 Put for 3.30

-Sell Sept 154 Put at 1.35

Break-Even On Sept Expiration:

Upside: stock btwn 161.74 and 170 make gains in the stock, 170 (up almost 4%) or higher your stock is called away less the .50 premium.

Downside: btwn 161.74 and 160 suffer losses of the stock, protected btwn 160 and 154, below 154 have no protection but you have mitigated 6.00 in losses less the .50 premium