As a special service to our readers, I will be offering a free webinar tomorrow (Wednesday). It will be for educational purposes (with several live trades) to throw some light on my process and strategies when trading weekly options.
Today, I want to go over a trading opportunity in gold (GLD). I will also go over the today’s gold trading opportunity in far greater detail in the upcoming webinar tomorrow.
Gold Trading Opportunity
Each trade I construct has three basic components.
First, I look for an asset that’s exhibiting an extreme in price movement. We know from millions and millions of price movement case studies that extreme movements usually return to the mean. This mathematical concept of mean reversion is one of the biggest keys to our income strategy.
I use the Relative Strength Indicator (RSI) on an asset or a stock or an ETF and then see if it’s either overbought or oversold. RSI simply measures how extreme a move has been over a period of time. The faster or more extreme the move to the upside, and the higher (or more overbought) RSI will be – and vice-versa.
Right now the commodities market – more specifically gold – is in a “very oversold” state again, according to RSI.
Once I see confirmation of an oversold state in one of the highly liquid ETFs I follow, like GLD, I immediately look for a trade.
Above is the November options chain for GLD.
Once I find an overbought or oversold asset, the second step is to use my brokerage account options platform to look for a high probability of success. I’ve written about this aspect of trading before, and it really is unique: only in the options world do you get a table showing you how much you can earn and the actual likelihood of earning it.
I’m only interested in trades with a greater than 80% probability of success.
After I find the odds I like, the third step is to look at the premium. The premium is simply the price of buying or selling a given option. It’s based on a per-share price, and since every option contract controls 100 shares, you have to multiply the premium by 100 to get the full price.
I know lots of options investors struggle with how to choose a specific price when selling options. My advice is always to calculate the yield on cash or yield on margin to gauge the percentage you’ll earn.
All of the numbers can be confusing, but if you focus on the probability first, and then calculate the yield, you can more easily gauge whether the trade makes sense for your portfolio.
In the case of the trade I’m targeting for Wednesday, we’re looking at a 14.9% gain in 45 days (or less), with an 80.9% probability of success.
Tools for Trading
I encourage you to familiarize yourself with the tools made available to you by your broker.
If they don’t offer them, consider switching brokers. Once you get used to the kind of baseline income that’s available from different scenarios, you will start to recognize the difference between good, average and bad opportunities – and you’ll become a better trader.
And one of the most important aspects of trading is being able to make that kind of informed decision.
For us to randomly select a trade based on the fact that it is Thursday or Friday, or any specific day for that matter, is irresponsible. The market doesn’t work that way. I mean, what’s the hurry? Why do we need to make trades every week, especially for arbitrary reasons? We are in this for the long haul, so we need to use the mathematical and analytical tools at our disposal to take a more methodical, long-term approach.
Again, on Wednesday I will be discussing in far greater detail my approach to weekly options. If you would like to learn more, please click here.
During this event, I’ll be going into much greater detail about this gold trading opportunity, as well as two to four other income trades you can make live, during my event.