Wednesday, December 28, 2011

Gold - Continuing to Use Options on GDX and GLD

As discussed in this article written over a year ago CCI described an approach to provide upside exposure to gold in a portfolio while minimizing the risk capital and out of pocket cash by selling put options in GDX and buying call options in GLD.

Over the past month, gold has fallen about 10%, and CCI closed out the latest version of this trade this month.  Earlier in the month the GDX Jan $65 puts were covered when gold was trading much higher for a $3.62/share gain. Today the GLD Jan $180 calls were covered for a loss of $5.29. A net loss of $1.67/share or 1.28%.  Not great, but not too bad considering the plunge in gold prices.

This type of trade was done three time in 2011.  Details of the trade for 1 lot can be found at this google doc. In total these three trades yielded 36.17%.  That compares to a gain of 24.94% if gold was held for the same time periods during the year, or about 9% if held from Jan 1 to now. 

For 2012 the concept of the portfolio having some exposure to gold to provided some "insurance" in the event of some macro level issue causes a discontinuity in the market remains appealing to CCI.  The option volatility and correlation between GLD and GDX remains similar as described in previous posts.   Hence CCI plans to continue to using this trade architecture.  Specifically today CCI
  • Sold 2 Mar $50 puts in GDX for a net credit of $620
  • Bought 1 Mar $155 call in GLD for a net debit of $532
A net credit of $88 or an insignificant 8.8 cents per share.   However, that means there is no out of pocket cost for getting exposure to gold in the portfolio, and reduced risk capital ($10k/lot) as compared to owning GLD.  CCI plans to sit on this position until some global macro event causes the gold bugs to push up the price at which time we will look to take profits.  If nothing drives the gold price upward by March it is probable the portfolio will be the proud new owner of gold miners shares at $50/share.  A position, that I'm comfortable taking on.

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