Gold Tests Key Support as Bullish Option Activity Increases

Gold has a history of outperforming during a market correction. The recent selling period is another example of this historical trend. Part of the reason is that gold’s selling is primarily a result of dollar strength and not the loss of value that stocks experience. On Tuesday, gold futures finished 0.17% higher while the S&P 500 finished 2.78% lower. As SPDR Gold Trust ETF (NYSEARCA: GLD) share price cozies up to its 50-day moving, the option market is looking more bullish.

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  • Since the selloff in March, the price has been bouncing off the 50-day simple moving average following its consolidation phases in late March, early June and yesterday. AS the price found its way to the average on Tuesday, the price bounced intraday off that level near $180.

    The price of gold has shown recent strength when compared to the S&P 500. This is a typical pattern during corrections in the market, especially when the dollar doesn’t strengthen substantially. The positioning of gold at the 50-day moving average, a ready Federal Reserve to inflate and weakness in the S&P 500 is a strong setup for gold.

    On Tuesday, there was significant activity on the 20 SEP 20 $175 call options. The volume for the day was over 12,000 contracts against an open interest of 7,607.

    Action to Take: The in-the-money strike that was traded is an indication that the price is expected to find support. A reasonable target is the July high near $194.50.

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  • Option traders may want to consider buying the 20 NOV 20 181/182 long call vertical for around $0.40 or less.

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