This Strategy Allows Traders to Generate Steady Income From Gold
Gold is an emotional investment for some people. Their desire to own gold might be grounded in concerns about future inflation or as a hedge against a cataclysmic economic decline. History is on their side in that events like that have occurred in the past. However, it can be expensive to own gold waiting for these rare events, and the expenses are not limited to the storage and insurance costs commonly cited as a drag on performance. In the past, gold has carried a large opportunity cost when the metal suffered through a devastating bear market.
Investors should remember that gold dropped nearly 70% over 20 years after peaking in 1981, and took nearly 30 years to recover to that old high. Over that same time, the S&P 500 was up more than 800%. It is possible gold could suffer another bear market in the future.
The pain investors felt during that time has become a distant memory after gold surged more than 600% in 10 years before topping in 2011. Stocks lagged over that time and returned less than 40%.
Gold now sits about 11% below its all-time highs and has been in a downtrend for about a year and a half, but is popular among many investors who believe gold is equivalent to inflation or economic collapse insurance.
If you would like to own gold, it could be worth buying it in a way that partially insures you against a loss and creates an income stream on your investment. An options strategy on SPDR Gold Shares (NYSE: GLD) can meet those objectives.
Covered calls are options written against a position that you own. Options contracts are for 100 shares of a stock or ETF so you will need to own at least 100 shares of GLD in order to use this strategy. For each 100 shares you own, you can sell one call option contract and earn a small amount of income. If GLD falls, the income earned on your options will offset the losses. If GLD rises, you will receive a profit on your shares and have cash you can immediately reinvest in GLD.
Specifically, I like the March $163 call options that are trading at about $0.98 cents. To execute this trade, you could buy 100 shares of GLD, currently trading at $159.55, or use 100 shares that you already own, and sell one call option to generate immediate income of $98. If you are buying the shares now, that represents income of 0.6% for a trade that will last five weeks.
If GLD is below $163 a share when this option expires, you keep the money received when selling the option and still own the shares. You can then sell another option, and repeating this process 10 times a year (once every five weeks) could turn your gold investment into an income stream that yields more than 6% a year.
If GLD is above $163 when the option expires, you will be obligated to sell GLD at that price and take a gain of $3.45 if you bought at $159.55 a share, or a return of about 2.2%. The options income will add $0.98 to your gain and result in a total return of 2.8% over five weeks. You will also have $16,598 in cash to reinvest in GLD.
Gold is traditionally an alternative investment, but with a covered call strategy, you could convert gold into an income investment and reduce the downside risks of owning the metal.
Recommended Trade Setup:
— Buy GLD at the market price and sell one March $163 call option for each 100 shares bought.
— Do not use a stop-loss. This is a strategy for those wanting to own gold for the long term.
— If GLD is below $163 at options expiration, you could earn 0.6% in five weeks from the sale of the call. If GLD is above $163 at options expiration, you could have a total return of 2.8% in five weeks.
Editor’s note: Amber Hestla-Barnhart is a former Military Intelligence Analyst with an eye for seeing what others miss. She now applies her unique training to the options world where she’s uncovered a glitch that could be worth thousands of dollars per year to traders. To see her report, and what she’s uncovered, click here.