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GLD Case Study: Part II - Trade Management

I previously described how rather than force a trade on GLD, I would be patient and let my set up come to me. This resulted in entering 8 x GLD Oct27 $120 calls on Friday, October 6th for $1.30 each (total investment of $1,043.11 including commission). I subsequently sold 6 contracts the same day for $1.63 (and welcomed $975.67 including commission back into my account), at which point my total capital "in the game" was $67.44.

My trade plan kicked in and was modified over the weekend. It stated that I would either take profit or adjust my position into a spread or butterfly if GLD touched the 20 simple Moving Average on the daily chart. This happened today 1 minute before 11:00 AM Wall Street Time.

I was presented with three choices:

a) Close my two remaining GLD Oct27 $120 calls for $3.25 (realizing a total of $581.56 after commission).

b) Convert to a call spread by selling two GLD Oct27 $122 for $1.60 (locking in $251.56 in profit after commission)

c) Convert to a call butterfly by selling four GLD Oct27 $123 calls for $1.16 and buying two GLD Oct27 $126 calls for $0.32 each (locking in $330.10 in profit after commission)

The first choice allows me to walk away from the trade and say "good job done, next." The second and third choices were compelling as I would be able to lock in profit, however give myself an opportunity to make even more without risk.

I chose to convert to a butterfly as I expected GLD to stall at the 20 sMA, potentially retrace to the 10 sMA and then begin moving up again towards my target. This may take a couple of weeks. If GLD chops until expiry day, I have the opportunity to make an additional $600 if it closes exactly at $123.00 on expiry day. The short legs would expire worthless and the long $120 call, my workhorse would be $3.00 in the money.

Here is my adjusted risk graph (courtesy of TomsOptionTools):

My trade plan going forward is to look for a bounce on the 10 sMA should GLD continue retracing. If it doesn't bounce, I will exit the butterfly for whatever I can get for it (it's pure profit). If it starts moving up again, I will exit if GLD touches $124.50 for the best price possible (which is also pure profit.

Trade management is a blast when your strategy is to adjust a trade from the beginning...