As I’ve been stating over the past few weeks, gold and energy look like an interesting short-term setup given the extreme oversold levels.
Today, given the extreme oversold readings, I’m going to open a position in the SPDR Gold ETF (GLD), more specifically a bull put spread.
As you can see below, IV rank is well above normal and I have no problem selling premium anytime we see an IV rank above 40. So, when the IV rank is sitting at 86.85 there is no doubt options premium is inflated and it’s a good time to sell a credit spread.
IV: 19.43%
IV Rank: 86.85
Expected Move (Range): The expected move (range) for the GLD August 19, 2022, expiration cycle is from 156 to 170.
The Trade
With the SPDR Gold ETF (GLD) trading for 162.46 I want to place a short-term bull put spread going out 42 days. My intent is to take off the trade well before the August 19, 2022, expiration date.
Simultaneously:
Sell to Open GLD August 19, 2022, 155 put strike
Buy to Open GLD August 19, 2022, 150 put strike for a total of $0.60 (As always, the price of spread will vary, so please adjust accordingly.)
Delta of spread: 10
Probability of Profit: 77.41%
Probability of Touch: 45.08
Total net credit: $0.60
Total risk per spread: $4.40
Max return: 13.6%
Risk Management
Since we know how much we stand to make and lose prior to order entry, we can precisely define our position size on every trade we place. Position size is the most important factor when managing risk, so by keeping each trade at a reasonable level (I use 1% to 5% per trade) it allows not only the Law of Large Numbers to work in your favor … it also allows you to sleep well at night.
I tend to set a stop-loss that sits 1 to 2 times my original credit. Since I’m selling the 155/150 bull put spread for roughly $0.60, if my bull put spread reaches $1.20 to $1.80 I will exit the trade. As always, I will keep you updated on the status of the position as it progresses and send any necessary updates as needed.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.