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Dec182015

GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spread: 70.21% Profit Banked in 120 Days

The 182nd trade that SK OptionTrader closed was a vertical call spread on GLD, the ETF that tracks gold.

Trade: Short GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spread

Entry: $4.06

Exit: $3.40

Return: 70.21%

Opened: 19-Aug-15

Closed: 17-Dec-15

Days Open: 120

Since the beginning of 2013 we have held a bullish outlook on gold. Through this year we have remained bearish, with the view that tightening by the Fed would drive gold to new lows. However, we respected the risks that had the potential to cause the Fed to delay the first hike, such as the slowdown in China and decline in oil dampening inflation.

We targeted a short trade that would take advantage of gold making new lows on a Fed hike anytime during 2015. This led us to GLD options with early 2016 expiries that held high upside potential if gold broke significantly lower towards key support at $1030, which translates to a GLD level of $98. One strategy that fit these criteria was a short GLD vertical call spread trade with March ’16 expiration with $100/$95 strike levels.

Therefore on August 19th we signalled to our subscribers that we had sold GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spreads for a net credit of $1.01. This means that we sold GLD calls with $95 strikes and simultaneously bought GLD calls with $100 strikes, both with March ’16 expiries.

If our view was correct, then the spread between the prices of the puts would narrow to $0.00 from $4.06. However, if we were wrong we could have lost the maximum downside of $0.94, the difference between the strikes of $5 minus the net credit of $4.06 received. The simple payoff diagram below illustrates this.

Our downside risks were clearly much smaller than our potential returns here. However, this was necessary as we looked to take advantage of a considerable break lower in the yellow metal, which held a lower probability of being realised. Therefore the maximum return of 431% and the constant increase in profits between a gold price of $1050 and $1000 gave this trade positive risk reward dynamics, as expected losses were much smaller than the expected gains.

Gold initially moved lower after we sold the call spread. However, after the Fed delayed the first rate hike from the September meeting gold bulls became energized and the metal began to rally. The hope of these speculators was that as the Fed had failed to hike in September, perhaps lift-off would never be achieved. This being a bullish scenario for gold, the metal rallied.

The October Fed meeting saw this come to an end, with Yellen paving the way for the first hike to come in December. Following this economic data remained strong, with nonfarm payrolls and inflation printing at positive levels. This allowed Fed speakers to signal the market that the first hike would very likely come at the December FOMC meeting. The expectation of hawkish action was priced into gold, leading to its decline.

Following the first hike this week we took profits on this trade. Our reasoning here was that gold had broken lower towards key support at $1030 after the Fed hike and this was the movement that we had initiated this trade for. Therefore we looked to action our trading plan and bank a strong profit of 70.21% for our subscribers.

We are pleased with the result of this trade. Although the realised gains were significantly less than the maximum possible, we were not swinging for the fences here. Our goal was to take advantage of a break lower in gold prices following the Fed hike, and we successfully did. The trading discipline here has avoided the risk of a possible rebound in gold, which would erode the profits we have now banked. Therefore we are happy with the result here, and look forward to repositioning this capital to take advantage of the next major gold movement.

SK OptionTrader Trading Record Summary

Number Of Closed Trades: 182

Average Return Per Trade: 28.34%

Average Duration Per Trade: 60.55

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