‘Golden’ Buying Opportunity for GLD?

Dear Reader,

Following the market’s open this morning, I began the day how I normally do, looking to see if there were any new stocks or ETFs that looked strong enough to merit being added to my ‘Buy List’.

As I was looking, one ETF in particular really stood above the rest. The ETF I am talking about is the SPDR Gold Shares ETF, symbol: (GLD).

You may be asking yourself, how did you find this ETF, Chuck? Well, it was pretty simple really, let me tell you about one truly elementary screening method I consistently use to find ETFs as they are breaking out to the upside.

This one method I use to spot ETFs in powerful uptrends is checking the daily ‘New 52-Week Highs’ list. If an ETF like GLD appears on the New 52-Week Highs list for consecutive days, this series of new highs is a signal that the ETF is currently experiencing a breakout higher.

You can see below in the current chart of SPDR Gold Shares that the ETF is displaying exactly the type of bullish breakout that I’m looking for. GLD shares have been making a series of new 52-Week Highs over the past few weeks.

The reason that I look for ETFs that have recently made a series of new 52-Week Highs is that generally there is strong conviction from investors which translates to strong buying pressure for the ETF. This flood of buying pressure will result in the ETF making a move higher.

Oftentimes, once an ETF makes a series of new highs, the breakout is not over and done with, in fact, in many cases it’s just getting started. In powerful bull markets, ETFs breaking out to the upside can often continue to trade higher for longer than most investors may think.

So, when I spot an ETF with a compelling breakout like GLD, this is an ETF I want to add to my ‘Buy List’ so that I can keep an eye out for a good trade setup.

How I Would Look to Trade It

Now that we have become aware of GLD’s bullish breakout higher, the next thing we want to search for is an attractive trading setup for the ETF.

Of course, you could simply buy the ETF shares, which we sometimes do, but, many times when we spot a setup like this we want to add a bit more leverage to our position to unlock more explosive profit potentials.

With a setup like this, we like to find a call option to purchase which would provide us with a little more leverage on our trade. By doing this, should the bullish trend continue, our trade is positioned to produce higher profits when compared to just owning the underlying ETF shares.

When selecting which call option to purchase, I often rely on my 1% Rule to help narrow down my choice of option strikes. The 1% Rule helps me select an in-the-money option that has a higher probability of producing a profit when compared to an at-the-money or out-of-the money option. Once I have one selected I will vet the trade using my Call Option Purchase calculator to determine the trade’s profit potential.

Below is a snapshot of my Call Option Purchase Calculator that shows the profit potential analysis for my trade. This example examines a range of GLD shares remaining flat up to a 12.5% increase at option expiration.

131.9% Profit Potential for GLD Option

The trade analysis shows that if GLD shares were to increase by just 1% at option expiration, this trade would make 5.1%.

Then looking at a few of the bigger potential moves, if GLD shares were up 5.0% at option expiration, our option would be set to profit 61.4%!

If that doesn’t sound good enough, get this, if GLD shares were up 10.0% at option expiration, this call option would be set to produce a 131.9% profit! That means the call option would outperform the ETF more than 13 to 1!

By following my 1% Rule to select which call options to purchase, this has helped me in the past to juice my trade’s profit potential, just like in the example shown above. Additionally, the 1% Rule helps to increase the odds that the option will profit as the underlying ETF only has to increase by 1% for the option to begin profiting.

The Hughes Optioneering Team is here to help you identify high-probability trades just like this one.

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