A Gold Pen! My Kingdom for a Gold Pen (GLD, XLU, DIA)

Buckle up and hold on, ladies and gems, because the ride’s about to begin and we ain’t got no insurance.

What we have instead is a whole mess of trades to review and a few new ideas to ponder, so get a pen while you’re at it.


We begin the week with a quick word about fellow scribbler Matt McAbby, who last Thursday penned a piece on deep-in-the-money options that’s a MUST read for all who care about their investments.

Here goes –

On March 3rd we recommended a deep ITM CALL position on the indexes. The letter was called As the World wars, Wall Street Waxes<, and there we recommended long positions on the DIA and QQQ index proxies. Just to illustrate the point McAbby was making let’s look at how the DIA CALL is doing.

We bought the January 2016 120 CALL for $43 when DIA was trading for $161.31.

Today, DIA is quoted at $165.72, up 2.7% since we initiated the trade.

The CALL, however, is changing hands for $46.10, a 7.21% increase over our purchase price – or exactly three times the gain in the stock – and less money invested on our part for the same action!

Pens at the ready…


We’re staying with the trade for the meantime. But you should feel free to close it out if you need the cash for a night out at Hamlyn’s with the wife (love those gravy-soaked piggies-in-a-blanket).


We’re going to have more to say about deep-in-the-money options and what they have to offer before long, but first a word on a utilities trade that we opened on February 24th in a letter called Downside Betting on Freeport and the Utilities.

We commented on this puppy last week, too, closing out our long XLU CALL position for a 67% gain in just two months.

Still remaining from that initiative, however, are a short CALL position and one long and one short PUT.


So today we’re closing out the short PUT.

The Numbers, Huey. Lay ’em on us.

You got it.

We sold the June 37 PUTs for $0.33 and today we’re buying them back for just a nickel. That’s a profit of 560%, and coupled with our $2.34 take from the long CALLs last week, we have $2.62 in hand and two options remaining to act on. We’ll keep you posted as things develop, but the good news is already in. Remember, our initial debit on the trade was only $0.60.

The Scourge of Time

In keeping with our earlier theme, Matt also emphasized in last week’s article that time is the long option’s enemy, while those who sell options have a trusted friend in the tickety-tock-tick of the clock.

A friend she is, indeed. We sold two sets of CALL options on the SPDR Gold Trust (NYSE:GLD) on March 3rd – one expiring later that month, the other in April. The first expiry we reported to you in One Golden Win, One to Go – a 100% take on the March 140 CALLs. The second we’ve yet to report, but it also came in a winner, just like Dirty Fissures in the 1932 Preakness – a full 100% take on that sale, too.


But we also have an open long position on gold that hasn’t gone anywhere. And we’d like to take a minute to recap that one here.

The story started last July, when we determined that gold was still in a bear market and still had another leg lower to complete its full Fibonacci retracement. The letter was called Bond Pit Butchery! Gold Sleeps with the Fishes, and there we recommended you buy the GLD June (2014) PUT, at the time trading for $2.30.

With gold’s subsequent retracement higher, however, we doubled up on our bet, in a letter entitled Kicking Gold in the Ingots, buying a second June 85 PUT and reducing our average cost on the trade to $1.68.

Yet still the metal didn’t cooperate.

So we took a third stab at her. This time in late March of this year, throwing everything but the kitchen sink into the mix as we bought another 20 contracts for a nickel each and reduced our cost base for the trade to a mere $0.20.

And what’s she look like now?

Take a look –


As you can see we’ve been in a sideways squiggle ever since the damn business started, with time devouring the value of our PUTs and old McAbby laughing like a hyena on Ritalin, his wide bucket shaking every which way, telling us we had no business doubling down on a losing bet from the beginning.

And we have to admit, we did go against our best instincts at every stage of the affair, sinking more cash into a long position to get a more favourable adjusted cost base and knowing well that buying options is a war against time.

And yet all that aside, the question remains – what’s going to happen next? And do we have a chance to recoup anything here?

For the answers to those stumpers, we turn to the charts.

Here’s GLD for the last half year –

To put it simply, there’s hope for the bears.

While RSI and MACD have evinced a slight divergence higher during the latest sideways slide (in red, at bottom), a development that could be counted as bullish, the moving averages are all trending lower and price is situated a mere hair above the last of them (red box). A twenty cent drop – a mere sixteen one hundredths of one percent – would put GLD under all her moving averages and careening toward last support at $122.84 (in blue).

After that, we’d move toward $114.

The gold chart looks in some respects like a dam about to break.

But we’re finished with options purchases for the meanwhile.

Today we’re going to sell.

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Wall Street Elite recommends you consider the following trades – 1) buying back your short XLU PUTs, as outlined above, and 2) selling six (6) GLD May 127 CALLs, now priced at $0.53, for a total credit to you of $3.18.


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Wall Street Elite recommends you consider the following trades – 1) buying back your short XLU PUTs, as outlined above, and 2) selling six (6) GLD May 127 CALLs, now priced at $0.53, for a total credit to you of $3.18.


Expiry’s this week.

With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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