After nearly three months of consolidating in a flat base, shares of the SPDR Gold Trust exchange traded fund broke out above a 317.63 buy point in a four-month chart pattern on Aug. 29. Since then, the fund has surged well past its buy zone. It's making it difficult for investors to establish new positions at current levels.
Gold has been on a remarkable run, climbing 43% so far in 2025. The metal has become an investor favorite amid mounting concerns over rising U.S. debt. Further, a weakening dollar casts doubt on the long-term stability of the greenback as the world's reserve currency.
But recent price action brings new challenges. While inflation remains above the Fed's target of 2%, it still is somewhat under control. That makes the elevated moves in the precious metal take on quite a speculative tone, which could quickly reverse.
For investors who are neutral to cautiously optimistic about gold's prospects, they can consider a call ratio spread on the fund.
Placing A Call Ratio Spread On SPDR Gold Trust
With shares of SPDR Gold Trust trading around 352, investors can create a call ratio spread by buying one 380-strike call while selling two 390 calls, both with an expiration of Nov. 21.
This trade goes for a credit of 50 cents a share, based on recent trading. This equates to the profit of $50 in a 100-share contract. That comes to pass if shares of SPDR Gold Trust trade below 380 on expiration. It also represents the trade's most common outcome if gold moves lower, stays neutral or rises slightly on expiration.
The maximum profit will occur if the fund trades moderately higher, and specifically hits 390 on the options expiration of Nov. 21. In this case the trade will realize a profit of $1,050. This also equates to a level that, from the stock's prior breakout, sits well into MarketSurge's identified profit zone.
While this trade realizes a profit in the vast majority of scenarios, if the gold fund continues to rally sharply higher past 390, investors will essentially become short a call option. This means the risk on explosive moves higher is unlimited. Due to this elevated risk, it is important for investors who take this trade to only take on a small position, despite the attractive payoffs.
In a hypothetical worst case scenario of SPDR Gold Trust trading at 430 — or 22% above current levels — by Nov. 21, investors would face a loss of $2,950 per set of contracts. However, investors will take solace that there is ample room for cushion to the upside with the trade having a break-even point at expiration with the exchange traded fund running at 400.50.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
