Sold GLD Vertical Put Spread

I’ve been getting left behind in this rally mainly thanks to my long position on VXX.  Also a lot of my naked puts are getting fairly far out of the money and covered calls are deep in the money.  That means a lot of the time value has already evaporated, so each positive day in the markets doesn’t give me close to the same beta in my account.  It’s hard to complain though when some of the underlying stocks in my positions such as JPM and INTC sell off after earnings and my options balance me out.  Still, I decided I needed more upside opportunities in the hopes of not getting left behind too far, but also not taking stupid risks with the rally this long in the tooth already.

That took me shopping for what’s hot and could stay hot for the next five and a half weeks through November options expiration.  It didn’t take me long to start considering a position on GLD, the large gold ETF.  My first inclination was to sell a naked put, but wised up quickly with the fear that I could just be wrong on the direction in the near term and the premiums didn’t cover too much downside risk with as fast as GLD can move in either direction. 

Since premiums were fairly cheap due to the current low volatility I started looking at buying a call, but again I couldn’t see enough profit potential over the next few weeks.  Based on the trend lines I draw, GLD has a chance of reaching $140+- in less than a month and a half.  With that target in mind I started looking at put and call spreads.  The risk/reward was equal with the call and put spreads I was eyeing and I decided to go down the put option path in case GLD heads lower and then finds support I might sell my long put for a profit and take the assignment on the short put to go long on GLD at a reduced price.  That would open the door to selling covered calls on it or buying a put and staying long if I thought another rally was due.  That might sound more complicated than it is, but the short version is that I see more opportunities by selling the put spread than buying the call spread.  

While GLD was trading at $133.79 I sold one November 140 put for $7.42 and bought one GLD November 130 put for $1.82 and received $557.97 net after commissions.  My total possible profit is the net premium I took in today, $557.97.  My total downside I can lose is $442.03 which is the difference between my strikes ($10 x 100 shares = $1,000) minus the premiums I already collected.  So, I’m risking $442.03 for the chance to make $557.97.  GLD needs to be above $134.42 for me to breakeven.   That’s only a little bit above today’s closing price.  I actually considered waiting until tomorrow or Friday for this trade to see if GLD retested its opening low after it gapped up today, but decided that even if it faltered in the near term I still think it’ll be higher next month when my options expire. 

One of the factors that could make it falter would be a strengthening dollar which I don’t think is terribly likely anytime soon.  If that does happen, my UCO shares would drop and my November 10 calls would cover me for 8.5% of the way down.  A stronger dollar could tip the SPX in the other direction and send my VXX shares higher again.  This trade doesn’t get me too much closer to a beta of 1 with the broader markets, but it could be a decent profit for a low risk if it works.