top of page

Got The Gold Bug? Here's Two Ways To Play It...

I've never been a gold bug, but I know a ton of people who are.

Honestly, I've never understood the fascination with the shiny, yellow metal.

Sure, over centuries of time, gold has been considered a store of wealth and the go-to asset in times of turmoil. But does it really have value?

Other than the few pieces of gold jewelry and coins that I have, I'm not so sure what it can do for me on a larger scale.

You typically don't pay with gold bullion when checking out at the grocery store, nor does it have much commercial use, as say, in housing construction or electronic gadgets.

But just like artwork, stamps, or even baseball cards, people will put a price on these types of collectibles, that over time, can be accepted as valuable assets.

Whatever the reason, some items are deemed to have value, and gold is one of the biggest. And right now gold is staging a comeback while the stock markets endure large volatility.

Here's a current chart of gold.

And speaking of gold, one of my favorite all-time television shows is the Twilight Zone, and they have a classic episode about gold with the most genius plot twist at the ending. Click here to watch the last three minutes of it. Beware, it's a spoiler, so in case you want to watch the full episode at some point in the future.

A Little Gold History

During my tenure as a pit trader on the New York Mercantile Exchange (NYMEX), the building also housed the Commodities Exchange (COMEX) which was where the precious

metals traded. These contracts included gold, silver, platinum and palladium.

I had known a number of the metals traders, and all of them loved gold. Not one of them was ever bearish. If you weren't long on gold, you weren't relevant.

But during the early-to-late '90s, which made up the bulk of my time on the exchange, gold could never get its mojo in gear, and languished between $300 to $400 per ounce. To me, there was no money to be made on a dud like that.

It wasn't until mid-2005 near the peak of the real estate bubble that gold began its ascent above $400. And although it took a slight tumble when the financial crisis hit in 2008, it regained its footing and rambled on to hit all-time highs near $2,000 per ounce in 2011.

Since then, gold has worked its way back down, tagging a low of $1,050 per ounce in early 2016.

From there it has meandered between $1,150 to $1,350 per ounce until it finally broke higher just a few weeks ago.

Here's a long-term chart of gold futures:

Your Best Bet To Get Long Gold

Although I have no stake or interest in buying gold, the recent and perceived future gyrations in the stock market could possibly keep gold elevated for the near-term.

If you're a gold bug and wish to play the possible move, you can do so with relative ease by using the SPDR Gold Shares ETF (NYSE: GLD). Here's the current chart.

GLD is extremely liquid and will trade in sync with the actual gold spot and futures markets, which makes it easy to get in and out. It also has options contracts, which to traders like myself, is music to my ears.

With GLD currently trading at $141.92 per share, here are your two best ways to play it:

1. Buying a deep-in-the-money (DITM) call option

I've given many examples of my DITM strategy in prior blog posts here & here, and it could be a perfect way to play a bullish bet on gold.

If you were to buy 100 shares of GLD at today's prices, it would cost $14,192.

But a June 19, 2020 $125 GLD call option (example shown below) would cost roughly $1,955 - that's a full 86.2% less cash outlay. The key to picking this specific call option is its 90% Delta, which gives the option almost point for point movement with the stock.

If GLD were to move up to $200 per share by next June, the stock purchase would yield a ROI of 40.9% - a spectacular result.

But, the ROI of the call option would yield 283.6% - almost seven times as much.

Plus, the call option is saving the investor $12,237 in upfront costs versus the GLD shares purchase. That's why the ROI is so much higher.

If you believe gold is ready for immediate continued upside, a DITM call option strategy could be a great play.

2. Selling an out-of-the-money (OTM) put option

I'm sure by now you know how strongly I feel about selling put options. I've written about it more than anything else in this blog. Most recent articles are here & here.

If you feel gold has moved too far, too fast though, you can "name your price" at a lower level that fits your risk profile.

For instance, a June 19, 2020 $125 GLD put option (example only!) is currently paying out $95 per each contract sold (splitting bid/ask price).

This will place an immediate $95 in your pocket in exchange for potentially buying 100 shares of GLD at $125 per share. You would follow through with the agreement only if GLD trades below $125 by June 2019. If not, another put option can be sold at that time to repeat the process.

As a put-option seller, you can't buy the shares at $125 while they're currently trading at $141.92. But you will be guaranteed to receive the $95 no questions asked.

At GLD's current price of $141.92 per share, it gives the investor another $16.92 per share of downside cushion ($141.92 - $125), which equates to roughly 12% below GLD's current value.

That's it!

There's your two great examples to stake a bullish claim in gold if you are so inclined.

Let me know your thoughts on this post, or any of our prior entries. Use the comment button below.

And if you'd like to get involved with our high win-rate put-option selling service - Smart Option Seller - just click here for more details.

I guarantee you've been missing out an untapped income resource.

Until next time...

- Lee

1 Comment

David Calhoun
David Calhoun
Sep 07, 2019

Hello Lee.

I can't share your bewilderment of gold and I can assume you feel the same about silver. However, I can only say Thank you for sharing this unofficial trade. I am a big believer in the commodities market. I think this market has been beat up for to long and will out shine the equity market.

Just recently, I went long on the silver ETF and love the possibility. Now, with your GLD suggestion I can break into the gold sector.

Any suggestions in oil? Or water?

Recent Posts
bottom of page