[Options] When the Ducks (Gold Bugs) Are Quackin, We Feed Them

Sean McLaughlin
July 29, 2020

The title of this trade plan is a modified take on a famous old floor traders saw. Basically, when experienced floor traders saw the entire pit screaming to hit the same bid or offer, the rule of thumb was to give 'em what they want. Take the other side and close your position when all those same lemmings try to hit the exits at the same time too.

It was the second easiest money on the floor (first was "trading against paper" --- which is you and me.)

The trade I'm putting on the board is a loose take on this idea. But instead of fading direction, we're going to fade the volatility premium priced into Gold options today.

Gold has been on the move lately. I'm told it's because of something the Fed may or may not have done? I dunno. I just follow price...

But what I've noticed is options premiums in Gold ETF $GLD have risen significantly in the past two weeks:

This rise in volatility is what I'd like to fade.

Of course, with this rising volatility and the high risk of political shenanigans, I'm going to put on a delta-neutral short premium play with defined risk.

Enter: The Iron Condor.

Here's the Play:

I'm selling the $GLD September 170/175/200/205 Iron Condor for an approximately $1.60 credit. This means I'll be short an equal amount of 175 puts and 200 calls, while being protected by an equal amount of long 170 puts on the downside and long 205 calls on the upside.

The most I can lose on this trade is approximately $3.50 (and that only happens if I hold this spread into expiration and $GLD is trading outside of my long strikes (below 170 or above 205). This is a pretty wide range that I'm comfortable with.

My goal is to keep 50% of the premium I collect at trade initiation. So if I get a $1.60 credit for the spread, I'll leave a resting order to buy-to-close this spread for a 80 cents debit, booking my profit.

If $GLD closes above 205 or below 170 at any time that I'm still in the position, then I'll close and book my likely but manageable loss and move on.

ASO subscribers can email me with questions here.

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~ @chicagosean

 

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