The last time I commented on Gold was 4 years ago. On April 16, 2013 I wrote Gold Recovery? Don’t Bet on it. In that article, I claimed that gold would not rise much by Jan 2015, and sure enough, GLD fell from $132 to $123, no move up. Before that, in fact, before I started here, in 2009, I wrote Will Gold Break $1250 by 2011? The result was “yes”, it did, and the option play I described was up by a factor of 4. A $2500 bet returned $10,000.
Now, we are, as they say, in interesting times. Jesse Felder of TradingView.com suggests that we are due for a breakout. (Click on the image for the better view)
Now, GLD, the gold ETF, is trading at $122.60, and we are looking at the January ’18 options at different strikes. Let me describe the logistics of the call spread. We can buy the $120 strike and sell the $130 strike. This would cost a net $4.45. And if GLD rose to $130, we’d see a return of $10 for the $4.45 bet. 2.25X our money (A 125% profit) for a 6% move in GLD. This is the amazing thing about trading options, in my opinion.
If we bought the spread from $130 to $140, the cost would be $2.18, and we’d look for a 14% move up to give us a 358% return (i.e 4.58X our bet).
The $140/$150 spread would cost $1.06 and result in an 843% (9.4X) return on a 22% move.
I don’t know what move Jesse is expecting, but at $160, the $150/$160 spread offers an amazing 18X return on a 30% move in GLD.
Let me stop here. Keep in mind, I am not a fan of gold for long term investing, but history showed that when gold breaks out, the potential move of 22% isn’t out of the question. In fact, this 1 year move occurred 3 years of 4, in 2007, 2009, and 2010. The careful use of options would have resulted in spectacular returns.