Trade Alert – (GLD) October 4, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Trade Alert – (GLD)

Buy the SPDR Gold Trust Shares (GLD) December, 2012 $160-$165 Call Spread at $4.00 or best

Opening Trade

10-4-2012

expiration date: 12-21-2012

Portfolio weighting: 10%

($10,000/100/$4.00) = 25 Contracts

Buy the breakout in gold. It is unfolding much as I expected. It will be a slow chop with an upward bias with the occasional gaps up, like today. When the Chinese come back into the market next week, we could get another one of those gaps.

I have looked at the entire precious metals space once again looking for the best way to play this. I considered the big producers, like Barrack Gold (ABX) and Newmont Mining (NUM). I thought about adding more silver (SLV) but didn’t want to add more exposure to the broader economy. Half of all silver produced is consumed by industrial processes that would fall off a cliff in a recession. So I keep coming back to the same conclusion; just buy more (GLD). It is the purest play.

There is an old Japanese expression; “When the fool is dancing, the greater fool is watching.” Ben Bernanke has spoken loud and clear. It is time to go back into the “RISK ON” trade in size and start dancing again. Gold will be a favorite target. But we have already had a great run, so any position you add here should have a lot of room for the inevitable round of profit taking.

The (GLD) December, 2012 $160-$165 Call Spread allows for a 5.1% decline in (GLD) and still expire at its maximum point of profitability. The $160 and $165 levels are also key support levels on the charts, giving you further protection. This call spread is really the best way to jump on a moving train. If you can’t do the spread for whatever reason, just buy longer dated calls outright, or the underlying ETF (GLD).

For the longer term fundamental case for owning the barbarous relic, please refer to my earlier piece on “If You Had Any Doubts About Gold” by clicking here at http://www.madhedgefundtrader.com/if-you-had-any-doubts-about-gold/ , and “The Ultra Bull Case for Gold” by clicking here at http://www.madhedgefundtrader.com/the-ultra-bull-case-for-gold-2/ .

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.

The same applies if you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.

Keep in mind that these are ball park prices only. Spread pricing can be very volatile on expiration months farther out. These are the trades you should execute:

Buy 25 December, 2012 (GLD) $160 calls at…………$14.70
Sell short 25 December, 2012 (GLD) $165 calls a…….$10.70
Net Cost:……………………………….………..……….$4.00

Maximum potential profit at expiration:
$5.00 – $4.00 = $1.00

(25 X 100 X $1.00) = $2,500, or 2.5% profit for the notional $100,000 portfolio for a three month position.

Dancing Fool!

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