But no market trend lasts forever, and traders can lose interest in gold as quickly as they found it. Chief among the risks to this rally is a resolution to the trade dispute during the G20 summit this weekend — a development that would allay one of the lingering concerns on investors' minds. And given that gold climbed so quickly — by more than 8% in June alone — a rollback could soon follow.
That's where the trade recommendation from Bank of America Merrill Lynch comes in. According to a team led by Benjamin Bowler, the firm's global head of equity derivatives research, it's suitable for traders who want to profit from a continued rally in gold but limit their downside if the gains discontinue.. Bowler observed that traders are paying a hefty premium for options contracts that bet on increases in GLD, the largest ETF of its kind.
With traders now aggressively jostling for GLD call options, Bowler recommends buying call spreads as a way to profit from further gains. "For those wary of spending 12 months of premium on outright calls, gold call skew offers an attractive opportunity to cheapen the trade," he said in a recent note to clients.
He continued:"We like owning Jun20 140-155 GLD call spreads . The structure costs ~2%, a ~50% discount vs the 140 call outright, and has a max payout ratio of ~5.7x."
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