Friday, April 15, 2011

Rolled Gold Option Positions Out and Up

With gold bumping along near its all time high, and time decay starting to more rapidly erode the value of the portfolio's option position.... the original position was closed. Further, the initial trade concept was rolled out and up to the September time frame. Details below:

Specifics of the trade can be tracked at the spreadsheet below. In summary

  • The GLD June $137 call was closed at $7.71. The first full cycle of this position generated a 7.3% return in about 2 1/2 months.
  • Sold two Sept $56 GDX puts and bought 1 GLD $148 call for a net credit of $1.20.

In Wall Street complex terminology, this trade would be called some sort of a risk reversal, pairs trade. The more common sense explanation behind this trade can be found in the original post at

The new trade follows the same logic in that article just rolled out to September.

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It is also worthwhile to document specific benchmark objectives for this position. Since I view gold as largely an insurance policy/hedge against instability it does not make sense to compare this to a basic benchmark like the S&P 500. Instead, I would define the performance objectives as follows:

  • The primary objective of this trade is to make large gains if some power hungry dictator, wild eyed terrorist, bumbling politician, or greedy banker create some black swan event that adversely impacts financial markets. In these cases, I assume gold would increase substantially, and the goal of this trade is to meet or beat the performance of gold. So somewhat arbitrarily if gold increase by more than 10% the goal of this trade is to outperform gold. Let's hope this doesn't happen. If it does there will probably mean bad news in a lot of other ways.
  • If gold is in some sort of bubble and it pops during the time frame of this trade, the intent of the options spread is to loose less money than holding gold. So again somewhat arbitrarily if gold decrease by 10% or more during this trade the objective is to loose less than a position in gold would have lost.
  • If gold trades sideways, arbitrarily less than plus or minus10%, the goal is to manage the options trades to break even. Obviously that would be easier if gold is up a few percent than down a few percent. However, the key point is that unlike other potential option plays to capture an upside in gold, the objective of this structure is to be zero cost if nothing significant happens.

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