Options for stock investors. A better way to trade.

New Trade Alert June 1st – GLD GOLD Exchange Traded Fund

GOLDen Pullback 

 

New Trade Alert for (GLD)

Gold Exchange Traded Fund September $110 Call @$7.75 or less

 


Risk Rating: 3     (1 = lowest   5 = highest)

Above Break Even Probability: 49%

Max Loss Probability: 21%


 

A more than triple digit percentage gain was made in GDX early in 2016 timing the turn in GOLD.   Money was banked on the bottom base with patience employed in the last months waiting for a profit taking pullback.

 

GOLD itself has been sideways between $1200 and $1300 since February and has retreated back to the support lows.  Renewed rate hike discussions have firmed the US Dollar and knocked back the Midas metal for now. 

 

GLD as the Gold Exchange Traded fund is holding the multiyear $114 pivot to put the reward to risk back in favor of the Bulls once again.   That key level is also the midpoint of the price action since 2014.

 

 

In the near term trade has traveled sideways from $114 to $124 for four months.  The first objective is the channel midpoint at $119 then the range top at $124. 

 

Only close below the $110 on the weekly basis would negate this bullish buying premise.

 

 

The Options Way: Unlimited Upside Potential with Limited Risk.

A GLD long call option can provide the staying power for a market upturn.  More importantly, the maximum risk is the premium paid.

 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

 

Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.  

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security. 

 

It is important to buy options that payoff from only a modest price move. 

There is no need to ONLY make money on the all but infrequent large price explosion.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

 

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With GLD trading at $116, for example, an In The Money $110 strike option currently has $6.00 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need.  Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

Trade Setup: I recommend the GLD September $110 Call at $7.75 or less.

 

This option strike gives you the right to buy the shares at $110 per share, a price not seen since February, with absolutely limited risk. 

 

The September option has three months for BULLISH development.   A 75 Delta on this strike means the option will behave much like the stock.

 


 
The maximum loss is limited to the $775 or less paid per option contract with a money management stop loss at half of the premium paid to preserve capital. The upside is unlimited.

 

The GLD option trade break-even is $117.75 at expiration ($110.00 strike plus $7.75 or less option premium).

 

A push above the $119 halfway point of the sideways range targets a move to the $124 recent top.  At that the option investment would gain nearly 100% to $14.00+. 

Leave a Reply

Your email address will not be published.