This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Making Green With Gold

Stocks in this article: GLD

For millennia, people have valued gold. There is something unique about it that no other metal has. Even today, it is still used as an asset that is the foundation of our modern system of fiat currencies.

We are certainly in an era of big government spending and deficits. All of the major central banks have engaged in some degree of quantitative easing, flooding the world economy with newly created money. This has lead many to wonder if we have a future of runaway inflation, despite the near deflation conditions currently extant. Gold is the natural hedge against this scenario, and many investors include it as a permanent part of their portfolio.

Gold is unique among asset classes, in that its correlation with other classes is uniformly low. By my calculation, the correlation between gold and stocks has been only 15% over the last five months, based on daily net changes. Typically, the correlation between individual stocks and an index, is north of 80%. So, gold offers diversification benefits few other assets can match.

We are also entering a seasonally good time of year for gold. For all these reasons, I think a bullish play on gold makes sense here. The SPDR Gold Trust (GLD) is now the second largest ETF in the world and offers a pure play on bullion. My choice is a butterfly spread:

Trades: Buy to open 1 GLD October 119 call for $3.45, sell to open 2 GLD October 123 calls at $1.86 and buy to open 1 GLD October 127 call for $0.91.

The net spread is $0.64.

The risk on this trade is the $0.64 debit. This is a bullish spread with a delta of .08. So, it is roughly equal to the risk of 8 shares of the fund. We will set our stop profit at $123.00 and exit with the maximum profit if the fund reaches that level. Otherwise, we exit the trade at the October expiration.

At the time of publication, Phil McDonnell held no positions in the stocks or issues mentioned.

Phil is a professional options trader and contributes regular commentary to the Daily Speculations website. Prior to trading professionally, McDonnell was a software developer for Dollar/Soft, a financial software company specializing in options software for equities, indices and futures. He also wrote the book, Optimal Portfolio Modeling, which was published by Wiley Trading in February 2008.

OptionsProfits, a new provider of options news from TheStreet, educates investors and acts as a catalyst for trading.

Readers Also Like:



Readers Also Like:



Readers Also Like:

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters