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How to Play Gold, Market Crash

Published on September 20, 2009

How to Play Gold, Market Crash

September 20, 2009

Since I last shared BYDDF, the stock is up +40%. After a sharp run in a very short span, it is now overbought and may take a breather around $7.5-$7.7 level ($6.3 if the pause is a bit more stretched) before a new surge begins.

What if there is a market crash? as we are approaching October, this subject is becoming more and more glamorous. If you want to play this low probability event, remember to check out SPX and VIX trade idea (Free). Pls note those trades are “what if” trades meant for a bearish scenario, these are currently losing money as market continues to advance. Those trades are now selling for almost half the price vs. when I opened those (I still own those). In fact similar trades or better ones can now be opened for a better price.

The other story of the past week is GOLD. It has been a week since gold crossed key $1,000 mark and it has managed to stay above $1,000. We’ll find out next week if $1,000 will be new support level for the major bull leg or is it going to be a new market top which might coincide with a US$ strength triggering a market meltdown.

Here is an idea on how to play GOLD’s move via GLD, an ETF by SPDR gold trust .

Before you proceed to read the trade, pls note this trade is for the Gold Bulls (but not a very aggressive one). If you are bearish on Gold then DON’T follow this trade.

Option Trading Strategy – An OOM Iron Fly coupled with an ATM Calendar spread. This allows benefits of a cheap OOM fly (up move) and Calendar (range bound action).

Specifics for the trade-

  1. Sell to open a GLD 105/110 Oct Bear Call spread AND 105/100 Bull Put spread (This is similar to a 100/105/100 butterfly). I like to get credit upfront and hence opening Iron Fly. This Iron Fly can be done for $4.24 credit, as of Friday close.
  2. Buy to open a GLD Oct/Dec 100 Put Calendar
An Speculative Trade for Gold

A Speculative Trade for Gold

For this trade to make money, GLD has to stay above $98.28 by Oct expiration and IV to not fall significantly as otherwise Calendar will be losing money. If however, by Oct expiration GLD stays anywhere around $105, the trade has potential to yield above 50%.

Analysts are divided on Gold’s prices. Currently there are as many bears as bulls. One group thinks that gold is forming a major top and another group thinks that $1,000 will soon be the floor for gold’s major upward move. I belong to the 2nd one with one exceptional scenario and that is, a short squeeze on US$. As US$ has now replaced JPY as favorite for carry trade, almost whole world is bearish on USD. What if USD strengthen? there will be a short covering driving a hard squeeze on US$.

Whether or not it can stay above $1,000 it is yet to be seen. And hence I chose that level as my lower break even. Due to unpredictability, I also termed this trade as “speculative trade”. If you do decide to follow this trade, pls ensure that you spend only the money you are willing to lose. As a general risk/money management guideline, I shall not invest more than 1-2% of capital in a single speculative trade.

Interesting week ahead.

Profitable Trading, OP

6 Comments

  • Avatar prakashsi says:

    9/21/09 GLD fills:

    iron fly (all oct):
    -1 105 call 0.53
    +1 110 call 0.23
    -1 105 put 7.20
    +1 100 put 3.20
    =4.30 credit

    calendar:
    +1 dec 100 put 5.60
    -1 oct 100 put 3.20
    = 2.40 debit

    total = 1.90 debit

    thx for idea

  • Avatar OptionPundit says:

    As of now, the GLD trade is losing money. At this point one could close the BCS leg, currently trading for $0.10 debit. We may choose to open a 100/105 BCS to generate additional credit later on but I think it is a good idea to hold on to see how event unfold this week.

  • […] are two of 5 total trades (other ones are POT, MON and GLD) that were shared as part of the speculative trades/bonus alerts to the OPNewsletter subscribers.  […]

  • […] include returns from speculative trades i.e. bonus alerts.  I shared trade ideas on GOOG and GLD. While GOOG trade required adjustment as GOOG quickly bounced from 480s  (I couldn’t close […]

  • Avatar OptionPundit says:

    This Trade is now making 80% profit assuming you bought the BCS for $0.10 debit as I shared earlier. Even if you didn’t, it is still up +74%.

    If you closed the BCS earlier than pls close the BPS leg, now selling for $1.12 debit. If you didn’t close the BCS earlier, pls close both the legs for roughly a combined debit for $1.40 to $1.50.

    The role of calendar spread is over, pls close that as well. In case you still want to play, you may want to roll the Oct 100 to Nov 100. But if I were to make a suggestion, close it.

    An excellent trade >+70% returns for less than 4wks holding. If you were following the trade i would like to hear how did your trade go?

    Profitable Trading, OP

  • […] GLD trade was closed for nice […]

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