Tuesday, April 7, 2015

GLD Analysis

Update 4/8/2015: GLD continued to fall sharply, piercing the lower boundary of the profitable zone. I closed the position for a loss.

The stock declined by -0.7% over the one day lifespan of the position, or a 252% annual rate. The options produced a -15.7% loss on debit, for a -5,703% annual rate.

The narrowness of the zone of profitability worked against the success of the trade, a result of a low implied volatility that produced a potential gain or loss of less than 2% in the one standard deviation range.

That's a small reward, and that forced me to compensate by narrowing the zone to an unacceptably risky extent. 

The solution, of course, is to have a minimum potential gain or loss -- perhaps 3% or so.

The SPDR Gold Trust exchange-traded fund (GLD), which is backed by gold bullion, broke above its 20-day price channel on Monday but reversed downward on Tuesday, positioning itself as a potential direction-neutral trade.

GLD has completed three breakouts to the upside over the past year, two of them failures, producing a 33% success rate. The average loss on unsuccessful bull signals was 2.0%

GLD has Weeklys among its options inventories, and I shall use the APR2 series of options, which trades for the last time three days hence, on April 10.

[GLD in Wikipedia]


The goal of my trade is to construct a direction-neutral position with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.


Click on chart to enlarge.
GLD at 10:50 a.m. New York time, 30 days hourly bars
Implied volatility stands at 15.3%, which is 1.1 times the VIX, a measure of volatility of the S&P 500 index. GLD’s volatility stands in the 11th percentile below its most recent rise. It was last that low in November 2014 and was typically below that level from then back into mid-2013.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

There's no way to successfully align the entirety of the one standard deviation or chart ranges with the zone of profitability. I have to trim the covered range in order to get a sufficiently good risk/reward ratio. The question is, trim at the top or the bottom?

As the chart shows, GLD's present movement is a downward correction within an uptrend, so it makes sense to trim at the bottom on the expectation that the present decline will reverse and then move higher.

Iron condor short the $117.5 calls and long the $118.5 calls,
short the $115.5 puts and long the $114.5 puts
sold for a credit and expiring April 11
Probability of expiring out-of-the-money


The risk/reward ratio stands at 2:1. The premium is 32 cents (14 cents for the calls and 18 cents for the puts).

Decision for My Account

I've opened an iron condor position in GLD as described above.

-- Tim Bovee, Portland, Oregon, April 7, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.


Two social media feeds provide notification whenever something new is posted.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

No comments:

Post a Comment