I woke up this morning to find our Gold Trust (NYSEARCA:GLD) May 2016 $115-$118 in-the-money vertical bull call spread trading at $3.00 - the maximum theoretical value which it is not supposed to reach until expiration on Friday.
I am therefore going to close out this position at $2.98 and give you 2 cents to execute. Or you can just wait until Friday.
Good Job! You made an 11.61% profit on your investment in only 11 trading days.
I think the secular revival of the bull market in gold continues. I just want some dry powder with which to buy the next $50 dip.
If you recall, the logic for entering this trade was to buy the breakout. That has been the lesson for gold for all of 2016.
The Gold Trust May 2016 $115-$118 in-the-money vertical bull call spread was a bet that would not trade below $118.00 at the May 20 options expiration in 15 trading days versus the current $123.38. At this moment, is trading at $122.93.
Gold is one of the very few investments that absolutely everyone wants to own this year. Almost all economic scenarios going forward are gold positive. Two-and-a-half months of flat line price action in gold gives us a reasonable entry point in the new bull market. If it can't go down, it surely must go up.
Remember, the reasons we like the yellow metal now are that it is the biggest beneficiary of a NIRP (negative interest rate) world, production will fall 20% over the next four years, and China and India are ramping up their reserve buying.
What we are seeing now is the unleashing of 67 years of repressed gold consumption by a newly rising middle class in China. It is highly reminiscent of the 39-year flood of gold buying let loose by president Richard Nixon's removal of the US from the gold standard in 1972.
As you may recall, that stampede lasted for eight years and took gold up from $34 to $900 an ounce. I was found standing in line in Johannesburg unloading my stash of krugerrands right at the market top.
China is already the world's largest gold producer - how much is anyone's guess. It is also the second largest importer, after India, unable to sate domestic demand. The yellow metal is a natural target for Chinese flight capital. We are still close to the bottom of a five-year bear market in gold created by an unremitting seven-year bull market in global stocks.
Only five months ago, the Federal Reserve was threatening eight consecutive quarters of 25-point discount rate rises, according to former governor Richard Fisher. When the stock market threatened to commit suicide as a result, that was taken off the table. The latest rally will allow the Fed to give us one, or possibly two more quarter point rate rises this year, but no more.
In the meantime, the rest of the developed world, like Europe and Japan, have moved to negative interest rates, in some cases, quite impressively so. Overnight cash deposits in Europe are now charging negative 40 basis points a year. This is fantastic news for gold, has given us some meteoric moves in both the barbarous relic and the miners.
There is more good news to come. Slowing global growth, the prospect of more sudden Yuan devaluations, and rising energy debt defaults in the US have all made gold sparkle more than ever. All that is needed is a good entry point, always the million-dollar question. It's a trend even my cousin Milton can spot.
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 deep in-the-money spread trades can be enormous.
Don't execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
- Sell: 38 May 2016 $115 calls at $7.95
- Buy to cover short: 38 May 2016 $118 calls at $4.97
- Net Cost: $2.98
- Profit: $2.98 - $2.67 = $0.31
- (38 X 100 X $0.31) = $1,178 or 11.61% profit in 11 trading days
Buy The Dip
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.