Options To Buying Gold Stocks

February 18th, 2012
in gold, silver, miners

For those of you who like the idea of owning gold but don't want to hold stocks, there is another way to invest.  Options are contracts that give the holder the right to buy or sell a stock or ETF at a certain price, by a certain date, for a certain amount of money called a premium.

  • Each call option contract gives the holder the right, but not an obligation, to buy 100 shares of the underlying equity at a price agreed upon anytime before the expiration date.
  • Each put option contract gives the owner the right, but not an obligation, to sell 100 shares of the underlying equity at price agreed upon anytime before the expiration date.

In reality most equities the options represent never change hands.  The holder just cashes in any premium left whenever he feels like liquidating the option.  Some equities are very volatile and premiums can move up or down more than 100% in a single day.

Below is a call option chart.  The colored area and white area meet at the approximate value of the underlying equity, or what is called "at the money".  The bid is the amount being offered for the option and the ask is what the seller is demanding.  Last means the last price paid for that option, the change is in dollars and cents.  Volume is the number of options traded at that strike price for the day.  Open interest is the number of currently open options.

You can also be the house and sell both types of options.  One word of caution.  When you buy an option you can only lose the amount of the premium, plus fees for the transaction from your broker.  When you sell an option you have unlimited liability.  I have been upside down by over 600% at times, meaning I owed the owner of the contract over 6 times what he paid for it.  When you sell an option you can only realize the premium price (100% of the cost of the contract).  The chart for puts looks essentially the same as the calls chart.

My three favorites for trading are Market Vectors Gold Miners (GDX), SPDR Gold Trust (GLD), and iShares Silver Trust (SLV).  I have a few rules when I trade options.  The underlying equity must have good volume making it easy to get in and out of.  If you pick a stock with no liquidity you may not be able to exit your trade when you want and the bid-ask gap can be huge.  I want a stock or ETF that has close strike prices, one dollar or less increments.  Some like GDX have half dollar strike prices which I really like.  GDX also trades in weekly contracts meaning you can buy or sell an option with an 8 day length.  Most options are in $5 increments and expire on the third Friday of each month.  The weekly ones are available each Thursday with an 8 day length expiring the following Friday.



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