I Sold Gold Today! New Forecast: Still Much Higher!

What? Those of you that read my articles and follow my twitter feed know that I have been bullish on Gold for quite some time. In fact I have been bullish on all metals and anything commodity related. My thesis has been that the Federal Reserve’s desire for inflation can only be achieved by the devaluation of the dollar in a zero interest rate environment and this will raise prices of all commodities and metals. I detailed this in articles from November and September.

But today I sold the January 130/134 call spreads on GLD for $3.10, the Gold ETF, that I had purchased on November 17th more than a month before they expired.  Does that mean I think we have hit a top?  Today was another new high so that might be understandable.  But it was also a higher high from a higher low, bullish.  Am I no longer bullish on Gold?  That spread should be worth $4.00 at expiry, why sell it unless Gold is going to fall?  No, I still believe the metal has along run ahead of it.  Let me try to explain using the chart below.

GLD

Risk vs. Reward

The answer is found in measuring the risk vs. reward.  The entry to the trade is certainly understandable.  Gold had fallen form its new high and found support at the 50 day Simple Moving Average.  The reward/risk ratio when I put the trade, assuming the worst case, a gap down below 130 that held below 130 until expiry, where I would lose all the money invested, was 2.31.  So for every dollar I spent I had potential to earn $2.31.  A more likely scenario where I had a stop at $1.00, has a reward/risk ratio of 5.48.  Neither are too shabby for for 2 months.   From that point Gold and GLD rose higher and broke through the upper strike, 134, pulled back and then gapped up above 134 again on November 30th.

Revisiting Risk vs. Reward

As GLD plateaued near 135 for a few days despite some price volatility, the spread would not budge above $2.85.  At $2.85, I had already earned a $1.08 and I could only earn $1.15 more, but it would take another 6 weeks to collect it.  More importantly the reward/risk ratio had moved to 0.40 on a worst case (lose it all) and 1.57 assuming the same $0.73 at risk (moving the stop up).   Friday confirmed that even a major move in GLD was not going to move the spread very much.  Both options were so far into the money that the deltas were were very close.  Time to look for an exit.  My plan coming into today was to sell the spread before the end of the day and look to re-leverage the trade into higher strike prices.  The spike at the end of the day allowed me to sell the spreads at $3.10, a tidy gain.

Trading is about risk allocation as much as finding setups and executing.  But risk allocation is an ongoing process.  Continue to monitor your reward vs risk ratios.  It will sharpen your trading decisions and make you a better trader.

(As always you can see details of these individual charts and more on my twitter feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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