×

How to give yourself a 70% chance of making money on gold: Trader

The gold miners ETF (GDX) has surged this year, and one trader presents a way to play the ETF with a chance of making money that "exceeds 70 percent."

The trade, which Todd Gordon of TradingAnalysis.com presented Tuesday on CNBC's "Trading Nation," begins with the thesis that gold is set to keep rising in the short-term due to currency trends.

"We've seen a pretty strong move up in the underlying gold market. The miners are leading the way," said Gordon. "I think if the U.S. dollar continues to stay on the soft side, it should press gold higher."

Gordon points out a $28 resistance on the ETF, which dates back to highs in 2014. Thanks to a recent push up to what he terms a "bull flag," Gordon believes the gold miners ETF is set to push up to this $28 resistance.


Gordon will use this predicted move to make his trade, but he cautions that buying options now is tricky.

"We are in a higher implied volatility market. There's been a lot of action going on in the gold market, so options — puts and calls collectively — are pushed up here," he said. "So it's not a smart play to be bullish by expressing that opinion with long calls."

Instead, Gordon expresses his bullish thesis by selling the 24-strike put to buy the 22-strike put. This trade will give him $0.53 per share, while risking a loss of $1.47 that is, the $2 width of the spread minus the $0.47 premium he is taking in.

That sounds like a low reward for the risk, but Gordon says that given the current market outlook for gold, the chances of his trade succeeding is very high, such that it "exceeds 70 percent."

"The marketplace isn't just going to give you a hugely favorable reward-to-risk trade with a high degree of success; the two have to balance each other out," he said. "So we have a high degree of probability by selling the put spread below the market on the way up towards that $28 from the weekly chart."

Read MoreThe volatile gold play that's nearly doubled this year

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