New Trade $GLD – Gold About to Break-out?

by Enis February 7, 2013 11:00 am • Commentary

I discussed my thoughts about GLD being at an inflection point in this morning’s Macro Wrap.  I wrote that I wasn’t sure which way it would break, but that I expected a break soon.  Now I’m picking a direction.  

This morning’s price action in gold was quite telling in my view.  It initially sold off on Euro weakness, but quickly rebounded after the open, on quite large volume.  Normally, dollar strength should be a negative for GLD, but the strength of this morning’s buying indicates healthy demand for the precious metal.  With GLD trading right at its 50 day ma, I’m going to pull the trigger on the long side:

TRADE: Bought the GLD ($162.51) Mar15th 165 call for $1.37

-Bought 1 Mar15th 165 call for $1.37

Break-Even on Mar 15th Expiration:

-Profits above 166.37

-Losses of up to 1.37 btwn 165 and 166.37, max loss of 1.37 at 165 or below

Trade Rationale:

I bought outright calls because I think the move higher could be quick given the compression in the chart.  I’d rather not cap my upside with a call spread given the low level of implied volatility and the chance of a substantial move in the next month.

Macro Wrap, Feb 7th, 2013: 

Part of my morning routine is to go through all the major asset classes globally, and get a sense for inflection points in the market.  Gold seems to be at such an inflection point.

Here is the 2 year chart on GLD:

GLD 2 year chart, Courtesy of Bloomberg
GLD 2 year chart, Courtesy of Bloomberg

The metal is currently wedged between the declining 50 day ma (in pink), and the flat-lining 200 day ma (in black).  After the strong run-up in 2011, gold has basically been much ado about nothing, trading between 150 and 175 in the ensuing period.  Given the recent tight consolidation between the moving averages, it does look like a break up to 170 or a break down to 150 is imminent.  Unfortunately, I see little evidence to indicate which way that break will be.  Even when I look at momentum charts or volume-based studies, nothing stands out to me to indicate whether there are greater odds of a move up to 170, or a move lower to 150.

So I’m not comfortable with a pure directional trade.  What peaked my interest though was when I looked at implied volatility pricing on GLD options.  The 1 year chart of 30 day implied volatility (in red) vs. 30 day realized volatility (in blue) in GLD:

1 year chart of 30 day implied vol vs. 30 day realized vol, Courtesy of LiveVolPro
1 year chart of 30 day implied vol vs. 30 day realized vol, Courtesy of LiveVolPro


Implied volatility is at its lowest level in the past year (and actually the lowest level in the past several years).  There is good reason for that, given that realized volatility is near 1 year lows as well.

However, this is where the wedging action becomes important.  If gold is near an inflection point, options prices are currently too cheap, since they’re priced off of a range period that I think is close to ending.  I see a potential trade here to simply buy volatility on GLD, with no directional bias, benefitting as long as GLD does break out in either direction in the next month.  No trade yet, but on my radar.

Markets overnight:

  • Asian equity markets were mixed, with no markets moving more than 1%.
  • European markets opened flat, and are now about 0.5% higher.  Both the Bank of England and the ECB signaled no change to current policy.  SPX futures are up 0.1%.
  • Dollar a touch lower, Treasuries lower, and commodities higher.
  • Jobless claims, Nonfarm productivity, and unit labor costs data at 8:30 am EST