Playing For a Tactical Bounce in Gold
There are a few ways to play a gold bounce, but the setup I like best is in the Junior Gold Miners ETF $GDXJ. Check out this recent flush:
That low printed on Friday feels like it could be a significant level for us to lean against, at least for the next few weeks. Fake-out breakout, anyone? And as you can imagine, options premiums have perked up a bit in recent weeks. So we're going to take advantage of that by selling some premium.
We're not aggressively bullish on $GDXJ here, only tactically. Meaning, we're only in it for a quick bounce.
Here's the Play:
I like selling naked short $GDXJ October 39 puts here for an approximately $1.08 credit. Due to the theoretically unlimited risk involved in selling naked short options, we'll be mindful to keep our position size small and our risk management tight.
The goal here is to cover these options (buy-to-close) when I can do so for around a 50 cents debit. This would represent capturing a little more than 50% of the maximum profit in this trade (the most I can make is the initial premiums collected), without having to hold the open risk all the way until October expiration.
If Gold, and by extension $GDXJ has not yet found its bottom, I'll look to exit this trade -- win or lose -- if we see $GDXJ close below our 39 strike price. That's our signal that we're either wrong or early (same thing) and it's time to get out and protect our accounts.
If you have any questions on this trade, please send them here.
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