Clive Maund
gold, silver, & oil shares
GLD and NEM Straddle Option strategies for PROTECTION & PROFIT...
originally published August 19th, 2009With a big move now believed to be imminent in gold and therefore in SPDR Gold Trust it is a good time to consider straddle options strategies for more sophisticated traders. Before going any further it must be emphasised that the Traded Options strategies detailed here should only be considered by those subscribers who are familar with these instruments and have an appropriate level of experience in trading them, although some of the Put options detailed here may be useful as insurance for those long gold and/or SPDR Gold Trust.
Because of the decaying time value of options, the only time that straddle strategies come into their own is when there has been a prolonged standoff or stalemate in the market that must end soon with a big move. Such is the case today as both gold and SPDR Gold Trust have been stuck in triangular trading ranges for about 6 months and a larger trading range for about 18 months. Straddles involve the purchase of both Calls and Puts so you have a double burden of time value decay to overcome before you can come out on top, but in rare situations such as we have today they can still end up being highly profitable, and have the added advantage for those long the sector that the Put element can be used to protect gold or gold stock holdings. The writer once did a straddle in a company called Trafalgar House in London in the 80's a day before results were released, which were expected to be good but were so-so, buying Calls which were more expensive and a heap of Puts which were cheap. The stock went into accelerating decline and the Calls quickly became worthless, but the Puts rose 1200% in a week.
We have changed our minds since yesterday regarding Newmont Mining as a candidate for a Straddle. While it certainly looks weak, it should at least work its way through the heavy resistance towards $55 on a gold breakout and advance towards $1300, so that the Calls make decent gains, while the Puts afford excellent protection/speculative gains in the event of sector breakdown.
SPDR Gold Trust
Suitable options:
Sept 100 Call at 0.25 these are so cheap they can be rolled if no action before expiry.
Oct 94 Call at 2.13, good price
Dec 93 Call at 4.30, good price
Sept 89 Puts at 0.65
Oct 89 at 1.20, very good price
Dec 88 at 2.71
Newmont Mining
Suitable options:
Sept Call 42.50 at 0.65
Dec 42 Call at 2.55
Sept 37.50 Put at 1.12
Dec 38 Put at 2.26
An unanswered question of course is how do we know, in the event of a breakdown whether it is a false whipsaw move to be followed by a sharp reversal to the upside, or whether prices will contiinue to drop and maybe plunge, i.e. whether it is scenario 2 or 3 in play. The answer is that we don't, and the action taken will depend on how things look at the time, and how you are personally positioned. If you hold stock you will probably want to retain the Puts for protection, if you are only speculating in the options, you may prefer to lock in the profit and let the Calls ride for free.
Posted at 9.32 am EDT on 19th August 09.
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The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities.
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