Trade Update $GLD – Taking Off Long Call Spread for Nice Gain

by Enis February 10, 2014 12:35 pm • Commentary

We’ve been waiting patiently on our GLD call spread since we initiated the trade on the first trading day of 2014.  After many starts and stops, GLD is making a new high for the year this morning.

While we do think GLD is headed higher in the coming months, our call spread only has 9 trading days until expiry.  With that short time frame, and Janet Yellen’s important testimony this week, we don’t want to risking giving up our current gains.  We’ll take our gain today on the call spread, and might look to re-initiate a bullish GLD trade in the future if the right setup presents itself.

Action:  GLD ($122.92) Sold to close the Feb22nd 120/125 Call Spread at $2.75 for a $1.28 gain

Considering Our Options $GLD – The Golden Ticket?, January 31, 2014

Our first trade in 2014 was a long call spread on GLD.  The precious metal gapped higher on day one, and we took a position looking for a move to the $125 area on GLD.

The trade was making nice progress until yesterday’s punch in the gut, when GLD ended down more than 2%.  Interestingly, GLD has started to take on more of a negative correlation with stocks.  GLD is now negatively correlated with SPY for the first time in 2 years.  The last time the 2 assets became negatively correlated was in the summer of 2011:

SPY vs. GLD correlation, 120 period, Courtesy of Bloomberg
SPY vs. GLD correlation, 120 period, Courtesy of Bloomberg

When we first initiated the GLD long call spread, our intent was not a risk-off position.  Rather, the technicals looked quite attractive on their own.  Checking up on those technicals, the long side in GLD still looks good, even with yesterday’s drop.  Looking at the second-month gold futures for continuity, gold held yesterday above its 50 day moving average, and both its 10 day and its 20 day moving averages are both rising:

Second-month gold futures, 10 day ma in green, 20 day ma in yellow, 50 day ma in pink, Courtesy of Bloomberg
Second-month gold futures, 10 day ma in green, 20 day ma in yellow, 50 day ma in pink, Courtesy of Bloomberg

So the short-term uptrend is intact overall, with yesterday’s pre-market low in GLD around 119.35 the spot where that uptrend is broken.

As a result, we’ll hang on to our Feb22nd 120/125 call spread unless that level breaks.  GLD still holds a decent possibility of a move to the declining 200 day ma around 127 in the coming weeks.

New Trade $GLD – Shiny Start to 2014, January 2, 2014

Gold and silver had a terrible 2013, and both precious metals closed near their lows of the year on Tuesday.

2014 is a new year, though.  More importantly, I pointed out in my CotD post 3 weeks ago some of the technical healing that has taken place in the precious metals space over the last 6 months.  The price action suggests a potential rebound to start the year in both silver and gold, in spite of the rabid negative sentiment (or perhaps because of it).

Here were my key takeaways in that post:

1)  Neither metal has broken its late June low (red), and the 100 day ma (green) has flattened out:

2)  Both have registered higher RSI momentum readings on this move lower (red arrow, lower panel), relative to the summer lows:

3)  The Silver/Gold ratio has been moving higher since that summer low, an indication of more risk appetite in the precious metals complex as a whole:

Finally, gold has broken its correlation with most other asset classes in the past 6 months, including the dollar.  As a result, I feel more comfortable analyzing the commodity’s price action on its own, without taking into consideration potential side effects (like those that might result from a Fed taper).

Put it all together, and I see good odds of a bounce in gold and silver in the coming weeks and months.  We indirectly expressed that view through our investment position last week, and plan on holding that for a long time to come.

Since then, gold and silver have been meandering near the 2013 lows, but no convincing move either way.  So what’s the updated view?

Well, first off, it’s encouraging to see both commodities firmly green on the first trading day of 2014.  Both are up more than 1.5%, and that’s on a day when the dollar is stronger (especially vs. the Euro and emerging markets).

Second, gold futures essentially matched their June 28th low on Tuesday, but promptly reversed, and the futures are now at their highest level since December 19th:

Front month gold futures, 50 day ma in pink, courtesy of Bloomberg
Front month gold futures, 50 day ma in pink, courtesy of Bloomberg

Silver also held above its June low, and is leading on the upside today as well.

It looks a lot like short-term selling exhaustion that pairs well with the longer-term technical improvement.

Finally, the Fed taper announcement is now out of the way, and the precious metals market has weathered that decision much better than the prior suggestions of Fed tapering in 2013.  Since the taper is priced in at this point, the potential for a macro surprise that hurts gold and silver is less likely going forward, especially given the negative sentiment.

TRADE: GLD ($118.20) Bought the Feb $120/$125 Call Spread for $1.47

-Bought 1 Feb 120 Call for $2.42

-Sold 1 Feb 125 Call at $0.95

Break-Even on Feb Expiration:

Profits:  Profits up to 3.53 between 121.47 and 125, max profit of at 125 or above

Losses:  Up to 1.47 between 120 and 121.47, max loss of 1.47 at 120 or below

Trade Rationale: I actually think silver and gold and silver mining stocks will lead on the upside, but implied volatility is much cheaper in gold itself, which is why we chose the call spread on GLD.  The 50 day ma comes into play around 121-122 in GLD, and I am betting that it will finally be cleanly breached to the upside.  The 128-130 area is strong longer-term resistance in GLD, hence the call spread.  In addition, we are long GG in the investment portfolio, so that should benefit from higher precious metals prices over a longer time horizon, outside of this GLD call spread position, which is a shorter-term tactical trade.