Did you miss out on buying Gold when it was at $1,700? In this article, we will describe a way to get a second chance to Buy Gold at $1,700!
We think everybody should own at least some gold as protection. If you have a $100.000 Portfolio, we think at least 15-20% should be invested in gold. $18,300 can buy you 10 ounces of gold at today’s prices.
On Thursday August 25th, when gold was trading around $1,720, we posted an article on our website, saying that, IF gold could manage to close above the 20 days Exponential Moving Average (which was at $1,751 back then), the uptrend could soon resume its course. Although it dropped to almost $1,700 intraday, it closed the day UP at $1,774 and thus above the 20EMA. Yesterday, gold was up another $56 and closed at $1,830. Too bad for those who missed out on the chance to buy gold at $1,700. Or, is it?
NO, all hope is not lost. One can sell a put option on SGOL (ETFS Physical Swiss Gold shares), (which closed at $180.92 on Friday), with a strike price of $180 which expires on December 16th 2011. This Put option had a Premium bid of $10.40 and a Premium-Ask of $11.60.
Let’s assume you get $11.00 (which is the middle of the Bid and Ask). By selling one such put-option, you take the Obligation to buy 100 shares of SGOL at a price of $180 (and thus pay $18,000 if the options are exercised), as one option contract involves 100 shares. In return for taking this obligation, you receive a premium of 100 x $11.0 = $1,100. If SGOL stays above $180 until December 16th, the options will expire worthless, and you can keep the entire premium of $1,100 (less broker commissions). If the price of SGOL drops below $180 by December 17th, the options will likely be exercised, and you will have to buy 100 shares of SGOL at a price of $180, BUT, since you already received a premium of $11.00, your actual investment is $169.00. Remember SGOL traded as low as $169.10 on August 25th, when gold was trading near $1,700. If you think $1,700 will be the new floor for gold, this would give you a second chance to buy Gold at $1,690 and a bit.
So IF you missed out on the chance earlier this week, all hope is not lost.
However, if SGOL does NOT drop below $180 by December 16th, the options will not be exercised, and you won’t get any shares of SGOL (but you can keep the entire premium of $1,100). So if gold continues its parabolic rise, you will be left behind with $1,100 in premium. That’s not too bad, but imagine gold explodes to $5,000 (see this article to see why that could happen), you will regret not having any gold at all. Imagine gold would rise to $2,500 by December 2011. I bet you would want to have some gold in that case.
Well, since you received a premium for selling the Put Option, you can also invest that premium in Call Options. Let’s have a look at the December Call options of SGOL.
The deepest Out-Of-The Money Call option on SGOL for December has a strike price of $200. That would be about $2,000 gold. The Bid- and Ask-Price as of Friday were $4.60 and $5.40 respectively.
Let’s assume you would have to pay the “worst-case”-price (the ask price), being $5.40. With the collected premium of $11, you would be able to buy 2 call-options. You would pay $5.40x100x2=$1,080 for the RIGHT to buy 200 shares of SGOL on December 17th at a price of $200 per share. If gold would trade at $2,500 by December 17th 2011, that would be about $250 per share of SGOL, the Premium of those call-options would be worth $50 (that is, the Share price of $250 minus the strike price of $200). Because you have 2 call-options, the total value would be 2x100x50= $10,000.
Since you wanted to buy 100 shares of SGOL (or 10 ounces of physical gold), your investment today would be $18,090.20 (100x Friday’s closing price of $180.92). If gold would trade at $2,500 by December 16th , this investment would yield about $6,623 (($2,500/$1,830)-1) or 36.61%.
By writing 1 put option and buying 2 call options, your return would have been $10,000 or 55.27%. Imagine if SGOL doesn’t drop below $180, you won’t invest any of your own money at all as the Put option will not be exercised, and your call-options are funded with the written Put Option!
You will start to make (free) money when gold exceeds $2,000 by December.
So IF you think $1,800 will be the floor for gold or you would really like to buy gold at $1,800, and you think there’s a chance of gold going to $2,500 by December 16th, this is a chance to make a nice $10,000.
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This is not a recommendation to Buy or Sell. Do your own Due Diligence.