Mine as well just answer in public in case others are also interested… For anyone looking to “trade” gold rather than “buy and hold” it, December is always a good month for traders to take a look at the gold miners because it’s dividend month. This is not a recommendation, but an example of a trade might be:
1) Sell GDX Dec (11 day) 21.00$ Puts @ .53$
On expiry if it’s above 21$ it’ll expire worthless and you keep your 2.48% gain. Not bad for an 11 day trade.
On expiry if it’s below 21$ you will be assigned at 21$ with a cost basis of 20.47$. The dividend should be announced soon which you’ll keep because you’re holding GDX on the record date. After that, just sell 21.00$ covered calls every month collecting premiums until your stock is gone.
2) Sell GDXJ Dec (11 day) 29.00$ Puts @ .81$
On expiry if it’s above 29$ it’ll expire worthless and your profit is about 2.76%.
On expiry if it’s below 29$ you get assigned with a cost basis of 28.19$ and wait for the dividend announcement. After that, sell 29.00$ covered calls until it’s gone.
I’ll track both of these trades to their eventual conclusion to see how the trade works in 2013.
If you went the GDXJ route the option would have expired worthless and you’d just keep your 2.76% profit for the 11 day trade. The GDX trade will continue another cycle.
Since you went with the GDX trade you were assigned at 21$. So now you own the shares at 21$ and the dividend is for 0.19$. Now you can try to dump the shares. We’ll sell the January 21$ calls for 0.54$.
0.53$ for selling the original naked put
0.19$ for the dividend
0.54$ for selling today’s covered call
Currently own 1000 shares at 21$. I’ll update again on the January expiry date.
GDX closed the cycle over the covered call price of 21$ which means our shares were sold and the trade is over. Profit for the trade was:
0.53$ for the original put
0.19$ for the dividend
0.54$ for the covered call
(33.98$ paid in trade fees)
Total trade profit: 5.84%
So gdx started and ended at about the same spot, but we came away with nearly 6% gains and did it in a much safer way. Because we traded options rather then buy and hold, our cost basis the whole time was well below the lowest price gold made in the month. More profitable with less risk, that’s the reason for option trading.
Brent, keep posting these trades - it’s very fascinating.
[quote=“BrentGolf”]1) Sell GDX Dec (11 day) 21.00$ Puts @ .53$
On expiry if it’s above 21$ it’ll expire worthless and you keep your 2.48% gain. Not bad for an 11 day trade.
On expiry if it’s below 21$ you will be assigned at 21$ with a cost basis of 20.47$. The dividend should be announced soon which you’ll keep because you’re holding GDX on the record date. After that, just sell 21.00$ covered calls every month collecting premiums until your stock is gone.
[/quote]
I’m trying to understand this trade.
Am I correct to assume you’re applying this strategy on a stock that you’re bullish on? Once you’re assigned GDX, you’re hoping that price will rebound to $21 to cover your buy-in costs.
Brent, keep posting these trades - it’s very fascinating.
[quote=“BrentGolf”]1) Sell GDX Dec (11 day) 21.00$ Puts @ .53$
On expiry if it’s above 21$ it’ll expire worthless and you keep your 2.48% gain. Not bad for an 11 day trade.
On expiry if it’s below 21$ you will be assigned at 21$ with a cost basis of 20.47$. The dividend should be announced soon which you’ll keep because you’re holding GDX on the record date. After that, just sell 21.00$ covered calls every month collecting premiums until your stock is gone.
[/quote]
I’m trying to understand this trade.
Am I correct to assume you’re applying this strategy on a stock(or ETF) that you’re bullish on? Once you’re assigned GDX, you’re hoping that price will rebound to $21 to cover your buy-in costs.
This strategy is the same as all the rest of my trading. Every position I take is entirely neutral. I don’t think it’s possible to predict direction in the short to medium term so I don’t even bother trying. I just set up neutral trades where I have a mathematical advantage and profits come through consistency and probabilities.
This trade above (which I call my wheel of fun) is direction neutral. It really doesn’t matter to me whether I get assigned or not or whether the shares are mine for several months or just one month. You can reduce your cost basis every month you hold the shares, and if you lose the shares there’s always another trade somewhere else.
Now I will say, you wouldn’t want to apply this strategy if you had an extremely bearish outlook for the markets. If the underlying tanks too far, you may be stuck holding it for a while. That’s not always a bad thing because as stocks tank, volatility rises and the monthly premiums on the covered calls are larger which will really reduce your cost basis quite quickly, but in a perfect world you’d want to hold each trade for 1-6 months if possible.