So we missed my last recommendation in the SPDR Gold Shares ETF (Ticker: GLD) …
I was right about the direction — but it happened too quickly!
On the morning of Feb. 8, a Monday, I recommended a long call vertical in GLD.
I had spotted a hammer candlestick, indicating GLD was going to reverse its downtrend and begin to trade higher.
Well, I was right … so right, in fact, that GLD opened up over $2 that day — causing the call vertical to be trading out of our reach. =(
GLD continued to trade higher over the next couple of days — eventually over $3 higher.
I did not chase the call spread, though.
Because of this rule of thumb …
Definitely give yourself a few cents leeway when trading in and out of your positions. Don’t miss a trade by a penny or two.
But also …
Do not chase a trade.
I was originally looking to buy the call spread for $1.35, so I may have paid up to $1.40 — but no more than that.
That spread ended up opening around $2 … nearly 50% higher than what I was willing to pay and actually trading in the territory I would have considered taking my profit.
I bring this up because I want to show you what I am seeing in the gold charts now … more opportunity — some might even say it’s golden.
Let me show you what I am seeing now in the GLD chart …
I drew the yellow support line on the yearly chart using two things:
A possible double bottom, indicated by the two arrows on the right, which may signify a trend reversal.
The previous resistance price, which, once traded through and revisited, becomes support shown by the two arrows on the left.
Now take a look at the Gold March Futures chart:
Friday’s trading produced a doji — a pattern that can be indicative of a change in the current downward trend.
The doji is also supported by the large size volume that traded on Friday … which shows just how significant the candlestick is because of all the players participating.
To confirm the change in trend, we will want to see today’s candlestick open higher than the doji body, which would be greater than $1,772.70.
Looking at the GLD options, I like buying the Mar05 expiration cycle (giving me two weeks), because I think this move will be happening right away and I don’t want to pay for the extra time premium that is priced into the further out options.
This also allows me to buy an option closer to at the money. The Mar05 167.50 calls are $.50 out of the money and trading around $1.90.
In the Mar12 cycle, the 168.50 calls are trading around $1.98, giving me an extra week, but cost $.08 more and are $1.50 out of the money.
I like buying the Mar05 167.50 calls with an implied volatility of 15.82 and, to spend less money overall, I will sell the Mar05 172.50 calls with an implied volatility of 16.28, therefore paying $1.40 for the $5.00 spread.
Buying a lower implied volatility and selling a higher implied volatility is a good strategy …
Remember, volatility is the one factor in pricing an option that is unknown. It is premium added to the option price determined by demand and the historical volatility of the underlying.
The more demand for an option and the higher the historical volatility of the underlying, the higher the premium (expense) of the options.
I would take my loss on this spread if it trades down to $.80-$.85.
In Revlon (Ticker: REV), I bought the Mar19 12.50/17.50 call spread paid $1.40 and said I would take my loss if it trades down to $.80. The REV chart is beginning to look a bit precarious. Usually after a large directional candlestick, you will get a flag or pennant formation. That means several days of trading at those upper or lower prices. The REV flag may have traded too low, therefore I am raising my stop loss up to $1.00.
British Petroleum (Ticker: BP), I bought the Mar19 23 calls paid $1.05. The stock is down $.30 and the calls are trading $.95, I still like this position, so I’m keeping it.
My iShares Silver Trust (Ticker: SLV) trade, long the Mar19 23.5/25 call spread paid $.50, I said I would sell at $1.00. It traded $.97 on Friday, I took those few cents to get the trade executed and I am out for a nice 94% gain.
Remember Shoppers, if you have any questions feel free to email me at email@example.com.
Thanks for Reading … See You Next Tuesday!