Call Options Or Put Options On SPDR Gold Shares (GLD)?

| December 19, 2012 | 0 Comments

GLD OptionsSPDR Gold Shares (GLD) is an ETF that holds gold stored in bank vaults.  It’s intended to reflect the performance and price of gold bullion. 

GLD currently trades for $161.62 per share.  The shares are up 9% from the 52-week low of $148.27.  However, GLD has fallen 7% from the 52-week high of $174.07 in October.

Is this an opportunity to buy call options on GLD before gold prices rebound?  Or should you buy put options on GLD as the selloff accelerates to the downside? 

The bulls make a convincing argument…

Gold bugs are quick to point out that gold is the ultimate safe haven.  It holds its value in times of crisis and protects investors from inflation. 

And there’s certainly the potential for a crisis… 

The impact of the US fiscal cliff, or any deal that is done to avoid it, could spark it.  And don’t forget about the sovereign debt crisis in Europe or unrest in the Middle East.  Either one could flare up at a moment’s notice and threaten financial market stability.

What’s more, central banks around the globe are engaged in easy monetary policy that is devaluing paper currencies. 

Put simply, investors own gold to hedge against these risks and they aren’t going away.

For these reasons and more, gold prices have enjoyed a multi-year bull market.  Since the onset of the financial crisis in 2008, GLD has soared more than 130%.

But nothing goes straight up forever…even gold needs to take a breather from time to time.  After a yearlong consolidation where GLD has bounced between $150 and $170 per share, it is ready to break out and resume its long standing uptrend.

But the bears have a compelling case as well… 

The reality is gold is just like any other investment.  It’s only worth what someone else is willing to give you for it… a characteristic all the more important for a shiny yellow metal with no real world usefulness.

And right now, investors simply don’t want to own gold.

At this point, the momentum that carried gold prices higher from 2008 to 2011 is gone.  A quick look at a chart of GLD reveals that it broke the support of the long term uptrend in May of this year.  And it hasn’t even threatened to make a new high since reaching $185 in September of 2011.

GLD did have a nice run in August and September as traders anticipated a move by the Fed to introduce more quantitative easing.  But since the announcement, GLD’s performance has been miserable.

In fact, the trading action on gold over the last few days smacks of panic selling.

Here’s the bottom line…

If investors aren’t compelled to own gold for one reason or another, there’s nothing to prevent prices from falling.  And right now, there’s not a catalyst to spur new investment in gold.

If you think the bulls are right, take a look at buying the GLD January 2013 $166.00 calls for around $0.72.

If you think the bears are right, take a look at buying the GLD January 2013 $162.00 puts for around $2.40.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.