Trader makes a ‘high-probability’ bet on gold’s next move

Gold is on track for its first weekly loss since May, but one trader expects the metal's slide to stop soon, and that has him looking for a way to play the gold miners.

While gold miners have flattened out this month despite rallying 117 percent from the beginning of the year, Todd Gordon of TradingAnalysis.com believes the metal is more likely to rise than fall from current levels.

"The gold market trades at an inverse relationship to the S&P 500," he said Friday on CNBC's "Trading Nation." "So what's happening is the S&P 500 is breaking out to new highs as gold moves down into support. I think it's a good time to buy gold at support as the S&P is getting a little overbought."

On a daily chart of the gold miners ETF (GDX), Gordon points out that the miners have consolidated around $30. He establishes new support levels with $27.50 on the low end and $28.50 on the high end.


To capitalize on this view, Gordon wants to sell August 29-strike put options and buy the August 27-strike puts for a total credit of about $0.60, or $60 per contract. The numbers mean that Gordon is risking $140 to make $60.

While Gordon is risking more than he could possibly make, he sees a high probability of success for his GDX trade, with a 65 to 70percent chance the trade works out. As long as the GDX closes above $27, Gordon will get to keep that $60 premium.

"If the trade moves too much below that short strike around $27, let's get out of the trade and salvage any premium that we can," he said.

The GDX hovered just below $30 during Friday trading.

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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect