Personally, gold has been a bit of bugaboo for this investor. While I think a tiny position in precious metals should be a part of any long-term diversified portfolio, actually engaging in profitable trades involving gold stocks and funds has proven to be … well, challenging.
In fact, I often rely on technical analysis when it comes to gold, yet still seem to often end up on the wrong side of the trade.
That’s why I’ve made it a habit to use options to play a variety of gold stocks. Using covered calls or naked puts, you can at least pull in some income while trading these instruments, and that helps reduce your exposure to the volatility of long-term movements in gold prices.
Your move, of course, depends on whether you are bullish or bearish.
This article isn’t about my particular stance — again, I’ve proven on several occasions that I’m not fantastic at “calling” gold.
The only thing I will bring up is the mos recent news, which is that on Tuesday, gold prices dropped 2.2%, and several important technical support levels were breached. You can read more about it here, but Tuesday’s drop came amid news on slowing Chinese imports.
If you want to tie your trade directly the price of gold, use options on the SPDR Gold Shares (GLD) exchange-traded fund, as the GLD ETF is tied to the price of gold.
If you are bearish as a result, take a look at selling naked calls. This is the opposite of a covered call, in which you hold the underlying stock and sell the right to someone else to buy your stock at a given strike price on a given expiration date. You collect a premium for selling that right.
With a naked call, you are doing the same thing, but you don’t hold the underlying stock. The risk you take is that gold takes off, leaving you with having to sell someone stock (or a fund) you don’t have. You thus have to buy the stock at the current price and must sell it at the lower price you contracted the sale at. It’s basically covering a short position. However, you can mitigate that risk by buying a call at a higher strike price if you wish.
The GLD ETF is great for options because it has many strikes and expirations to choose from.
As a for instance: GLD closed Tuesday’s trading at $121.84. If you are bearish on gold, sell the June 21 $122 naked calls for $1.75. If you are bullish, you would do the opposite by selling naked puts. In this case, you are selling the right for someone to put the stock to you. The June 27 $121.50 put is going for $1.87. You hope the price goes up. If it goes down, the stock gets put to you at a price that is likely to be higher than at expiration.
Of course, maybe you don’t want to have direct exposure to gold. Well, you could tap the gold miners.
If you use the MarketVectors Gold Miners ETF (GDX), you are one step removed from gold and into an industry that can ramp up or slow down depending on gold demand.
The GDX ETF trades at $22.41. If you are bearish, sell the June $22.50 naked calls for 63 cents. If you are bullish, sell the June $22 puts naked for 44 cents.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.