The market has sold off of late. This is a shock to a market that has pretty much been in rally mode since December, a necessary correction for the bulls, and an ominous and welcoming turn for the bears.
Why did the market sell off?
- In the past two weeks, the Federal Reserve and the European Central Bank (ECB) said they will not put more liquidity into the market.
- A Spanish bond auction essentially failed last week.
- With the weakness in Europe, there was a move to the dollar (and a move to the dollar means a move towards gold as well).
- Oil has fallen, so have the oil companies, and with that the indices.
- Traders have made a lot of money in the past four months and are taking profits off the table.
For traders and investors, the debate is whether the sell-off will continue and deepen.
What will drive the market down? Nervousness about Europe.
What will drive the market up? More liquidity from the central banks, perhaps due to problems in Europe or a recession in the U.S.
What potentially moves higher in both situations? Gold and its cousins: silver, the Gold Miners ETF (NYSE:GDX), and/or individual gold-mining stocks.
I could not have said this a few days ago as the gold miners separated from gold, forging a wider separation than we’ve seen in many years. But they have moved in tandem with gold the past couple of trading days and that is both reassuring and indicative that the gold trade is coming back on. And gold is one area where you can look for income.
Take a look at these two income-generating positions.
The first is to sell puts on the SPDR Gold Trust (NYSE:GLD). With the GLD trading around $161, take a look at the May $155 puts – you can get around $140 per contract for selling them. If the puts expire worthless, the return will be 0.9% in a month and a half, around 7.2% a year.
The other play is the poor man’s gold – silver – via the iShares Silver Trust (NYSE:SLV). The SLV is trading around $30, which has held as support for quite a while. If you sell 30-strike May puts, you generate $90 a contract for a return of 3% in six weeks, around 24% a year.
If you are worried about this being too long a period of time, there are weekly options on both the GLD and the SLV. For example, you could get $16 a contract this week for the SLV $30 puts with an expiration of April 13. If you do that 50 times a year, you have a 37% annual return.
Michael Shulman is editor of Options Income Blue Print. Learn more about trading weekly options in this free short video.
For purposes of disclosure, Michael own shares of the GLD.