We have been watching a beautiful chart pattern set up on gold over the last few weeks, and we feel this is a good spot to enter a trade.
Technically speaking we are seeing a descending triangle chart pattern, and with a break-out up through the down trend line and now a retracement back to the same down trend line, we are bullish on gold. Statistically, this chart pattern has a high probability of pushing price higher, but there is a chance of a neutral (sideways) or continuation lower. We are betting that prices go higher from here.
Trade Idea: Gold Short Put Spread with Long Put Spread
Without over complicating the concept of this trade, we will post a screen shot of our position. We will also go over our reasoning for trading this spread.
The position is set up first as a credit spread which is set a little more than a standard deviation out of the money, so this is a high probability trade to start with. We then cut deltas and put on a small hedge in the form of a Put debit spread set at the money. If we go higher we are completely fine, if we go sideways we are completely fine. The real test on this strategy is if we go lower. If we do go lower we will reduce the amount of credit spreads on, but if we go lower at a slow pace we will be fine as theta increases to the downside, we just don’t want a fast gold market to the downside.
Adjustments for this position are pretty basic, we will reduce the size of the credit spreads as our short Put delta increases.