Trading Gold and Silver with Options (GLD)
I'm excited to announce that I just activated my brokerage account to trade options.
Now, I know options might seem like a departure from my commodities background. And the overwhelming public perception of options is that they're risky.
Of course, public perception of stocks is that they're safe, and the public barely seems to understand the bond market at all - so I think you'd be best advised to ignore public opinion, if not take the opposite position of whatever the public may believe.
The biggest trick the devil ever pulled was to convince the world that he doesn't exist. And the biggest mistake an investor can make is to underestimate risk in any asset class.
Stocks, as we know, can be incredibly risky. Bonds too. And so are commodities. Options are not inherently riskier than any of these other asset classes.
The propensity to behave foolishly might be higher than with these other asset classes, but you can just as easily go broke buying stocks as you can trading options.
Okay, I'm off of my soapbox now.
I'm excited about opening up my options account because with stock market volatility as high as it is right now, your potential to make money selling options is necessarily higher.
Higher volatility means higher options prices. It's as simple as that.
Now, what you might not realize is that you can use options as part of a commodity investing strategy.
Thanks to the advent of Exchange Traded Funds, you can easily take advantage of commodity price swings with options. There are ETFs covering just about every commodity out there that you might want to invest in: gold, silver, oil, natural gas, softs, uranium, etc. - and most of them have enough options contract liquidity to let you reproduce any strategy (long or short) on commodities that you might care to.
Now, most investors will buy or sell straight puts or calls. And if you do so, you can either win big, or lose big.
But I've been working closely with an options guru named Andy Crowder, and he's been teaching me some slightly more advanced options trades that yield income, but aren't nearly as risky as a straight put or call strategy.
For instance: say you want to produce income from options using the gold ETF SPDR Gold Shares (NYSE: GLD). If you believe gold will go down in price, you can execute what's known as a "credit spread":
Sell the GLD Sep11 181 call
Buy the GLD Sep11 183 call
That gives you a 26 cents net credit. One options contract trades 100 shares, so your credit would be $26 for this specific trade.
Gold can go up 6.5% between now and expiration and you'll still make money. In fact, even if GLD hits 180, you would still make 13.0% on this trade.
You are not required to have a precise direction on the market. No crystal ball necessary. In fact, you can make money on a trade even if GLD moves in the opposite direction of your belief as long as it does not exceed your short strike at expiration. In this example, it would be the 181 strike.
If you believe gold will go up in price, you can execute a similar credit spread buying and selling out of the money puts to similar effect.
I'm excited to get started using a small portion of my portfolio to use similar options trades to bolster my income on a regular basis.
I'm not going it alone though. As I said, I've been learning from Andy Crowder - a seasoned options pro.
If you're interested in learning more about options, send Andy an email at andy.crowder@wyattresearch.com.
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