GLD, SLV, GDX at 2008 Uptrend Line, Put Hedge Up (Gold, Silver, Miners)

7/7/2010: Here's an update from my previous post on 6/29 saying that John Paulson of hedge fund Paulson & Co. should hedge his gold denominated fund or massive $GLD ETF position with puts. Paulson & Co as of 3/31/2010 owned 31 million shares of $GLD which was his top holding. The August and September in-the-money $121 and $122 put contracts performed well during the technical sell off. As you can see from the chart below, the puts are up 25% to 50% in 7 days while $GLD lost 3.3%. $GLD is sitting right at ascending channel support from the 2008 low and being squeezed in an ascending triangle near the vertex point (where ceiling resistance crosses the uptrend line). The same can be said about $SLV (the Silver ETF) and $GDX (Gold Miners).

Options can see massive swings as implied volatility (fear/greed) of the underlying stock changes. In this case my opinion was that GLD would witness downside volatility if it failed to break above ceiling resistance and broke below $119.5. It hit a low of $116.10 today. I talked about a similar trade a few months ago involving USO (the oil ETF) when it risked a failed breakout at ceiling resistance. The puts more than doubled in that case.

The trading blog (video) thinks the gold trend will stick and perhaps move sideways from here. Watch that trend line folks, GLD, GDX and SLV are still above it. Hedging is your friend, if you can front the insurance premium (and time/price it right).

$GLD vs. GLD AUG, SEP $121-$122 PUTS (OptionsXpress)

$GLD (SPDR Gold Trust Weekly Chart) -

$GLD (SPDR Gold Trust Daily Chart) -

SLV (iShares Silver Trust ETF)

$GDX (Market Vectors Gold Miners ETF)

Education you might find useful:
Chicago Board of Options Exchange (CBOE): Protective Puts As a Hedge
Definition of Implied Volatility at Optionsxpress