Hello all, this is my first Post so I will quickly introduce myself: I'am a 24 year old Pharmacy student from Germany, just recently getting interested in the numismatic side of "investing" into gold. My Main Topics of Interest are with the Livonian/Teutonic Order aswell as the Dutchy of Courland and the general Hanse area. So with the recent rise in the gold price i was thinking about selling some gold at 1500$, but was quickly turned away by the spread i had to pay. The biggest weakness of investing into physical gold is taking that haircut, atleast when dealing with a regular gold-dealer. So I did not sell my gold to a dealer in the End, but did something that pretty much gets better the more Gold one owns. Its a option strategy called "covered call". If you use Options to hedge your Gold, pls let me now, but it does not seem to be a big thing, so I'am trying to raise some awareness. A small example: I own 10 ounces of gold. I want to take profit on it, because the gold price is quite high, but still I'am long term believer in Gold and I like my gold and don't want to loose 200€ total spread to my dealer. Here is what I do (real example): I sell a Call (Promise to buy x-Amount of Gold for y-Price and z-Time-Frame from me) x= 10 ounces y= 1500$ z= 41 days For this service I provide, I get paid some money (I completely limit my up-side on my Gold, and grant all possible profits on that gold towards the buyer of said call, that has to be worth something) The sold Call will net me 330$ right now (real example). This I can keep, or buy more gold. Note: In order to sell options you need to have colateral in your trading/options account which in this example mounts up to: 2850$ with my option broker So what happens after 41 days? 1.The Price of Gold stays the same: -> I make 330$ 2.The Price drops to 1400$: -> I loose 1000$ on my Gold I own and get 330$ 3.The Price rises to 1600$: -> My Option-Account will show me now -670$, but my gold I own is now worth 1000$ more: means I make 330$ I will keep my Gold and I will be able to win something no matter what happens. If I sell my Gold I loose like 200$ spread to a dealer and have no gold left, hoping for lower prices. But who knows where the market goes This can also be applied to silver or any other commodity. It's a strategy that does not make sense under 10 ounces of gold, which is the minimal contract size (atleast if selling a Call on GLD ETF). If you want to sell Options on Futures , one of those contracts would have the size of 100ounces (quite alot). By adjusting the time frame and the strike price of the call one can further get towars a perfect solution based on once opinion on the market. To make it short, you can get some productivity out of the gold you own. What do you think, would that be a valuable strategy for you, or are you using it already?
I think you need to include what happens if the buyer of the call exercises it: 1. Gold price stays the same. Buyer of the call unlikely to exercise the call, but might if it's a convenience or shipping issue. If they exercise it, you get $15K for your gold plus the $330 option sales fee. If they don't exercise the call, you keep your $15K-worth of gold and still get the $330 option sales fee. 2. Gold goes to $1400 per ounce. Buyer of the call would be insane to exercise it because they can buy the gold more cheaply at the market price. You get to keep your $14K-worth of gold (has an unrealized loss of $1000) and the $330 option sales fee. 3. Gold goes to $1600 per ounce. Buyer would be insane not to exercise the option. They can buy your gold for $15K and immediately sell it for $16K. Your gold is gone, but you have $15K for it plus the $330 option sales fee. Don't forget; there will usually be transaction fees to pay as well when you sell or buy options. Cal
@Merkur, I am glad a knowledgable investor like you turned up here, as I am a little short on change at present. May I ask you, would you mind, you got two 10s for a 5?
Your right, I did not adress the risk of early Assignement. This will mostly happen with Options that are way out of the money. It can be avoided by rolling the call (increasing the days) before the option expires. Its important to fully understand what you are doing when playing around with options. @eddiespin I don't think I get your message right, meant to be sarcastic? Just trying to get a discussion on / get people interested in learning about their possibilities when holding gold. @calcol well your gold never leaves you, but you would be assigned a 15k short position, getting a margin call because you do not have the colateral Depending on your broker that can be a hassle, thats true But your physical Gold never moves.
Why not use a straddle option trade where your current gold is never in play? You just pay for the offsetting options and "lose" if the price just sets on the same range, or you win if it goes up or down past a certain point (value), so all you lose is the price of the options. I use that process. Jim
In my Opinion, Options are made to be sold. They are meant to get bought by mostly big Investors, for them to hedge very large Positions. By using a covered Call strategy you can limit your risk you have while holding gold, but you stay bullish. Buying options as a straddle is a strategy most usefull, when you speculate on a rapid increase in volatility. Thats quite hard to predict. If it works for you, great, but blindly using that strategy would lead towards bleeding dead. If you want to "trade" Gold while owning it physically at the same time . there is no way around this strategy. If you already have 100% Risk to the downside with holding real gold, why not benefit from it? Its best to sell a Call when Volatility(IV) is high. This means you get more premium. Around 1500$ Volatility is on a year-high for example.
If the price goes up to $1600/ounce and you retain your gold, you have effectively sold it for $15K and bought it back for $16K. With the $330 for sale of the call, you're down $670. Your broker may let you carry this negative balance in your option account (but charge you interest) because you have $2850 on deposit. However, if gold had gone to $2000/ounce and you retained your gold, you will have sold it for $15K and bought back at $20K. You would be down $4670. You'd get a call from your broker to deposit a few thousand $ real quick or kiss your gold goodbye. Cal
I think you have to start with the right dealer, if your dealing with some one That wants your first born to trade Gold, then its time to move on, i think Your making an easy transaction in to a difficult one, the right the right Dealer will always be fair, remember every body gets there cut, your job As an investor is to buy low and sale high, economics 101
You talk about "taking a haircut" on the "spread" you have to pay when "dealing with a regular gold-dealer" when investing in physical gold. What exactly do you mean by that? Are you talking about the difference between the Bid & Ask Price? My understanding is that it is a set amount based upon Spot. Right now at "Provident Metals", an Online Dealer, their posted Gold Bid is $1,496.85 and their posted Gold Ask is $1,499.61. That's a difference of $2.76 per ounce and $22.76 per 10 ounces. But "JM Bullion", another Online Dealer, has the Ask at $1,497.60. The difference between JMB's Ask and Provident's Bid is $0.75 and for 10 ounces it's $7.50. I'm just giving an example of buying physical gold and the prices that can be obtained on the same Saturday when Gold Spot prices are not going anywhere. A $7.50 difference or even a $22.76 difference is hardly a big deal when gold goes from $1,400 to $1,500 which is a gain of $1,000 on 10 ounces. The same would go for your local coin dealer. Is there something I'm missing? Because I don't see where there is a "haircut"?
Yes, I was exactly referring to the Bid/Ask spread. If it is so low for you, thats great. For me currently the lowest spread for one ounce in Germany is online atleast 8€ when looking at different dealers and around 20-25 with the same dealer per ounce. At my local dealer it is even higher. So for me easily it is 80-250 € for 10 ounces. Without packaging cost. @calcol correct, but the gold you own at home is now also 16k worth (given current prices) If you are missing Collateral, then you might be forced to sell your physical gold. There is also always a worst case: Lets say you sell a Call at 1500 for 330$ Price goes up to 1600 Now you sell a second Call for 330$ Price drops down to 1500 You loose in the End -1000$+330$+330$= -340$ on your options broker account. Your Gold is now still worth 1500$ per ounce in total. So you loose 340$ an your total gold. If you want to eliminate all further risk, you can sell at 1600$ your physical gold at the dealer, take your haircut and be happy about the 330$ profit you made with your option. Pays for the Spread and a Night out. You can try to increase your upside potential with choosing a strike price of 1550$ for Example, Instead of 1500$. This would only net you 150$ Premium, but when the Price goes to 1600 you make 150$+(10x50$) = 650$ in total. But there is still risk involved, there is no free lunch when dealing with the market.
In the first example (sell call at $1500/ounce strike price), you sold for $15K, as the buyer of the call would have exercised it at $1600/ounce. So you have traded your 10 ounces of gold for $15K plus $330 received for selling the call. In the second example, the call strike price was $1550/ounce when market was $1500/ounce, and the call sold for $150. If price goes to $1600/ounce, the call will be exercised. So yes, as stated, you would have traded the 10 ounces of gold for $15,650. No one should sell a call unless they are OK with giving-up the underlying security or commodity at the call price regardless of how high it might go before the option expires. Retaining the gold (same as repurchasing) if the call is exercised at a higher price is essentially a bet that the price will go even higher. The bet is financed by proceeds of the sale plus additional cash, either outright (you pay-off the negative balance in the option account) or borrowed (you carry a negative balance in the option account). When it comes to commodities, which gold is, futures (i.e. options) make the most sense for producers and consumers of the commodity. A gold mine or refinery might sell calls to obtain cash to finance current operations. Presumably the strike price will be at more than break-even for them, and the expiry term will be long enough that they can pay off the call with product if needed. A consumer of gold, like a mint or jeweler, might buy calls to insure a ceiling price they must pay for their raw material. If the market price goes down, they ignore the option and buy at the lower price. If the market price goes up, they are supplied with raw material at the strike price. Cal
Yes you are correct. Maybe the title is somewhat misleading. Still selling calls on Spot Gold is a very valuable strategy while being aware of the risk involved with options in general. The examples we are talking about are quite high moves in price. There is always the opportunity to increase the days in your call, collecting even more premium and giving the gold-price a bit longer to comes down, that you are not forced to sell said gold. In the End it is a good way to make money in particular when gold goes down. You hedge yourself in a limited way. The Norm is that one nearly never gets assigned a option, I usually sell the option to the market for some bucks before it expires, or roll it out to the next month. With this example based on real data, lets just see how it goes. If necessary to adjust the position, I will give an update on it. For Transparency: The Call is a GLD 20 Sept 2019 141$ Call with a 330$ Premium.
