Use Gold to Foil the Crisis Summer GLD ETF and VIX ‘Fear Gauge’ profit as market sinks

This summer is shaping up to be a time of “negative catalysts” only – the federal debt ceiling crisis, the ongoing drama in Greece and with European banks in general, a softening economy with falling home prices and rising unemployment. Good stuff, eh? Yes, if you play it right.

There are almost too many ways to play a choppy summer and timing the ups, downs and insanity of politicians is impossible. So play the market itself.

Say what? You mean, play the S&P or NASDAQ indices?

No — that’s a sucker’s game.

You mean, play the banks and the home builders, the industries in the thick of this summer’s news and trading action?

No — those are long-term short positions, not something to trade at this time.

I mean play uncertainty — both in the real world and the market. Real world uncertainty means gold; market uncertainty means the CBOE Volatility Index (CBOE: VIX).

First, gold. The SPDR Gold Trust (NYSE: GLD) is the exchange-traded fund for gold and like the precious metal it has been stuck in neutral for quite a while.

Do you agree with me that — 1) Greece will eventually default in some fashion and — 2) politicians here will kick the can down the road on real measures to fix structural deficits and the rising debt? If you agree, the long-term play is gold, and you can play it three ways:

• Play the metal straight up and buy GLD.
• Play the metal straight up with some risk; buy the GLD Jan 2013 LEAP options at the $165 strike price. That means you see a 10% gain the commodity and are willing to invest in the option premium for the next 18 months.
• Buy GLD and sell covered calls against it. You can choose from the options that expire Weekly, as they are called, and the regular monthly expiration options. Use the proceeds to average down your position.

• Second, the VIX. This measure of market uncertainty, called the Fear Gauge, is the friend of the trader who wants to make money but is uncertain of market direction. So she trades uncertainty. Sounds like the “Whose on First” routine but this is a real trade. The VIX has been near its historic lows and the summer should prove to be volatile in the real world and in the markets.

  You can trade the VIX four ways:

  • Play the VIX straight up by buying calls. If you go this route, the VIX is now between 20 and 21 so look for something no later than September and no more than one strike price above the current price.
  • Buy the ETF for the VIX, the VXX, known formally as the iPath S&P 500 VIX Short-Term Futures (NYSE: VXX). This is roughly around 25 and is a solid long term play on volatility.
  • Buy the calls on the VXX. The premiums on the VIX calls are typically lower due to the liquidity in the index. That’s a good thing when you are buying them but not necessarily when you are selling them. That’s why some traders buy calls on the VXX. Look to buy them close in — August or September — and a bit out of the money, the $26 or $27 strike.
  • Buy the ETF and write calls against it. As with gold, there are Weekly and monthly calls and you can use the proceeds to average down your position.

  Have a good summer and be careful.