Tuesday, April 17, 2007

Gold Stocks - Trade Idea

Over the last year, I have benefited from one trading strategy involving gold stocks. First of all, I believe that gold will continue to rise, first as a hedge against inflation and second as a hedge against the falling us dollar.

With that said, it seems that gold stocks would be the place to be. My strategy is simple: write 'in the money' naked put options on gold stocks that I wouldn't mind owning for the amount of shares that I am willing to buy.

The seller of a put option has the obligation to buy shares in a company at a specified price at a certain time. In return for this obligation, a put seller gains a premium. Most gold companies are volatile, thus garnering larger premiums.

As an example, take Barrick Gold Corp (ABX on the NYSE; ABX on the TSX). Currently, this stock is trading at around $30 USD per share. Assuming that you thought this stock was going to follow the price of gold higher and that you wanted to buy 500 shares, then following the strategy above, you would:
  • sell 5 put contracts (uncovered) for the month of May for a premium of around $1 per contract
  • ensure that your account has enough money in it to finance the trade (in this example, $15,000)
Doing this, you would gain $500 (minus commissions) and come the third Friday of May, if the stock is trading less than $30, you are obliged to purchase 500 shares at $30 dollars. Otherwise, you keep the $500 and repeat the strategy the next month if you still are bullish on Barrick and the price of Gold.

Keep in mind that there are numerous gold producing companies out there, not just Barrick Gold and that those companies that exhibit wild fluctuations in daily share price, usually garner larger premiums.

Good luck.

  • I am not be liable for any investment decision made or action taken based upon the information on this page.
  • I suggest you check with a broker or financial adviser before making any stock investing decisions.
  • I am not offering financial advise, but rather commenting on widely available investment strategies.
  • Finally, Caveat emptor!

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