Back on September 20, 2018, I wrote an article for The Rich Investor on the price of gold and how it looked ready for a move higher.
Well, how did it do?
At the time, we focused on two different option strategies that could take advantage of the bullish view.
We used the SPDR Gold Shares ETF (NYSE: GLD) as our vehicle of choice, and it was trading for $113.50 per share back then.
On February 5, it was changing hands at $124.
Here’s the current chart.
Clearly, the directional call was right, as GLD has moved up roughly $10.50 per share, which equates to roughly a 9.25% gain in four and a half months.
Not too shabby.
But what led me to my bullish assessment?
Being a chart guy, most of my directional calls are based on what I see in the charts, and that has served me well for the past 27 years of being in the business.
But it was also some research from the Ned Davis Group that was displaying major pessimism toward the gold market, which typically indicates a contrarian view, and one that could lead to a bullish move ahead.
And although the GLD move was extremely timely, as we pretty much nailed the lows, it was more of how well the option strategies have worked out compared to a straight stock purchase.
Options Deliver the Goods
As I said, the stock has rallied $10.50 per share, giving a purchase of 100 shares a gain of $1,050, and a return-on-investment (ROI) of 9.25%.
But what about the two option strategies?
We discussed my favorite option-buying strategy of using deep-in-the-money (DITM) call options as a way to get a foothold into the bullish play, one that imitates the purchase of actual stock shares.
Instead of spending $11,350 on 100 shares of GLD, we spent 77.6% less by buying a June 2019 $90 DITM call option for $2,540.
Now with GLD near $124 per share, the $90 call is option is currently worth $3,480, yielding a gain of $940 and a ROI of roughly 37%.
As we had calculated in the prior article, the $90 call option had a delta of 90%, meaning its value would move 90% in lockstep to the stock’s price.
With a call option gain of $940 versus the stock gain of $1,050, it yielded an 89.5% correlation. So, I’d say the delta worked exactly as it should have.
Plus, the 37% ROI for the call option is hands down way more favorable than the stock’s ROI of 9.25%.
Score for the DITM call option!
And what about selling the put option?
We used a hypothetical trade of selling the June 2019 $100 put option for $43 per contract.
The goals of put-selling were to:
- Attain current upfront income ($43 per each contract sold).
- Gain the opportunity to buy GLD for $100 per share – a $13.50 discount to its then current price.
As of February 5, with GLD trading at $124 per share, the $100 put option is now worth $4 per contract.
If someone wanted to close out the trade, they could lock in a gain of $39 ($43-$4) per contract by buying the put option back.
That would equate to capturing 90.7% of the full potential profit of selling the put option.
Whenever an option is sold as the initial transaction, the maximum potential gain at the expiration date is whatever was received on day one. In this case, that was $43.
Since the put option could be bought back at $4, it’s like locking in 90.7% of the full $43 gain.
In my advisory service – Instant Income Alert – I always strive to capture at least 80% of the full profit before expiration. This is called my “80% Rule” and it allows us to lock in early gains so we can put the funds towards new trades.
The GLD trade has gone above and beyond the 80% threshold and could be closed out four months before the June expiration. That’s what I call a great trade!
As for the DITM call option – gains could be taken here as well, or you could hold if for more potential gains.
To recap, here are the results of the stock versus options debate:
- Stock purchase gained $1,050 with ROI of 9.25% on $11,350 invested.
- DITM call option gained $940 with 37% ROI on $2,540 invested.
- Put-sell captured 90.7% of the full profit potential with no outlay of cash.
This is just another example of how option strategies can be superior to outright stock trading.