×

Trader looks to triple his money by betting on gold

Gold continued its rally Friday, and Todd Gordon of TradingAnalysis.com believes its run isn't done.

The yellow metal has climbed more than 2 percent since the Federal Reserve's decision to hike its interest rate target on Wednesday. While higher rates are technically bad for gold, the Fed appeared to be a bit more dovish than investors expected, leading the dollar to dip and thus gold to rise.

"We are looking for continued higher gold prices on the back of a pretty dovish Fed," Gordon said Thursday on CNBC's "Trading Nation."

Looking at a chart of the gold-tracking ETF GLD, Gordon predicts the yellow metal can actually return to its highs from the end of February. While the ETF did sell off through much of March, its rally post-Fed decision has actually led it to recapture half of its recent losses, which Gordon terms a "50 percent retracement."

The achievement of this retracement leads Gordon to believe that GLD can keep going and "retest" the $120 level that it hit in February, which would represent an additional 2 percent rally.

In an attempt to profit from such a move, Gordon bought the April 7 weekly 117-strike calls and sold the April 7 weekly 120-strike calls for a total of 91 cents per share, or $91 per options spread. The trade expires April 7, meaning that if GLD closes above $120 on that day, then Gordon could more than triple his money by making a maximum reward of $209.

The trade's breakeven level is $117.91, and if GLD closes below $117 on April 7, then Gordon would lose the premium he paid.

"It doesn't matter how low gold might fall – if we're wrong in this trade, max loss would be $91 per options spread," Gordon said.

That said, he'd advocate exiting the trade if the options spread's value falls by half, as in that case, "obviously our premise for being in the trade is wrong, so let's contain risk and move on to the next trade."

GLD is currently up more than 6 percent year to date.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect