GLD Momentum

Update 7/15/2015: As expiration neared, GLD drifted down to the edge of my position's profit zone, and I exited with a small profit.

Shares declined by 1.3% over seven days, or a -68% annual rate. The options position produced a 5.4% yield on debit, for a +282% annual rate.

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The SPDR Gold Trust exchange-traded fund (GLD), which tracks bullion, broke below its 20-day price channel on Tuesday, but moved back within the channel the next day, signaling a possible opportunity for non-directional trade.

[GLD in Wikipedia]

GLD

Odds

Only two out of the six bear signals completed in the past year have been successful, marking GLD as a potential sideways play, if the spin is positive, or as a vicious whipsaw play, if the spin is negative.

GLD's two winning signals on average produced a 3.9% yield over 498 days, while the four unsuccessful signals on average lost 2.0% over 12 days.

Ranges

Click on chart to enlarge.

GLD at 12:25 p.m. New York time, 30 days hourly bars

Implied volatility stands at 15.3%, which is 4/5ths the value of the VIX, a measure of volatility of the S&P 500 index. GLD’s volatility stands in the 96th percentile of its most recent rise.

However, the rise was quite small and came within a long-term declined. GLD stands at 61% of its peak for the past year. That's on the low side, although I'm willing to look at trades where volatility is above half the annual peak.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	114.04	116.71	112.58	N/A
Lower	108.7	106.03	110.05	N/A
Gain/loss	2.4%	4.8%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

I shall use the JUL monthly series of options, which trades for the last time nine days hence, on July 17.

Iron condor, short the $113 calls and long the $114 calls,
short the $110 puts and long the $109 puts,
sold for a credit and expiring July 18.
Probability of expiring out-of-the-money

JUL	Strike	OTM
Upper	113	73.3%
Lower	110	68.8%

The premium is $0.39, or 39% of the width of the position’s wings. The stock at the time of purchase was priced at $111.37.

The risk/reward ratio is 1.5:1.

The challenge with GLD, given its low implied volatility in absolute terms, is to get enough premium to get an acceptable risk/reward ratio. I've done so by leaving portions of both sides of the one standard deviation range outside of the zone of profit, although the interval between support and resistance on the chart are entirely within the zone.

Decision for My Account

I've opened a direction neutral position in GLD as described above.

-- Tim Bovee, Portland, Oregon, July 8, 2015

References

My volatility trading rules can be read here.


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Disclaimer

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.

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Based on a work at www.timbovee.com.