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In my recent article, "Let Newmont Mining Pay For Your Gold," I expressed my hesitance for using the gold miners as the principal way to obtain exposure to gold prices. I also said, however, that "if having exposure to one of the larger miners can do something unique for my portfolio, I will certainly give it due consideration." As I outlined in that article, Newmont Mining's (NYSE:NEM) gold-price-linked "Enhanced Dividend Policy" is an out-of-the-box policy that can be used to help investors fund their gold storage costs.

Another possibility for using the miners to supplement your physical gold investment involves put options. By creating out-of-the-money put option credit spreads on several miners, you can make double-digit annual returns without the miners ever having to rise in price. In fact, depending on the strike prices you choose, the miners could even decline significantly in value, and you would still realize a double-digit return on your money.

What is an out-of-the-money put option credit spread?

Putting together an out-of-the-money put option credit spread may sound incredibly challenging, but it actually is not. Let me briefly explain what it is by defining each component of the complex sounding title.

Out-of-the-money refers to options that only have time value left in their premiums. In other words, if today were option expiration day, out-of-the-money options would be worthless. This is because their intrinsic value is zero.

Put option refers to a contract that provides the owner the right, but not the obligation, to sell the underlying security at a particular price (the strike price). The put option seller, on the other hand, has the obligation to purchase the underlying security at a particular price (the strike price) under certain conditions.

A credit spread involves buying and selling options at prices that result in a net credit to an investor's account. This is done by selling an option with a higher premium than the option purchased. The credit is the difference between the option premium collected on the contract(s) sold and the option premium paid on the contract(s) purchased. Using a credit spread, an investor is able to limit his or her risk to the difference between the strike prices sold and purchased multiplied by the number of contracts traded multiplied by 100 (100 shares per option contract) minus the credit collected.

Credit spread opportunities in gold miners

Let me begin by first saying that option prices can move quickly. The prices and percentages mentioned in this article may have changed since the time this was written.

Newmont Mining

Short-term: Sell the January 19, 2013 expiring $41 puts for $0.48, and buy the January 19, 2013 expiring $39 puts for $0.27. The net credit, ex-commissions, is $0.21 per contract, a 10.50% return on your money in 45 days. That is an 85.17% annualized return as long as the stock is not trading 9.37% lower on expiration than where it is today.

Medium-term: Sell the June 22, 2013 expiring $36 puts for $1.13, and buy the June 22, 2013 expiring $29 puts for $0.36. The net credit, ex-commissions, is $0.77 per contract, an 11.00% return on your money in 199 days. That is a 20.18% annualized return as long as the stock is not trading 20.42% lower on expiration than where it is today.

Longer-term: Sell the January 17, 2015 expiring $33 puts for $3.85, and buy the January 17, 2015 expiring $30 puts for $2.99. The net credit, ex-commissions, is $0.86 per contract, a 28.67% return on your money in 773 days. That is a 13.54% annualized return as long as the stock is not trading 27.06% lower on expiration than where it is today.

Barrick Gold (NYSE:ABX)

Short-term: Sell the January 19, 2013 expiring $30 puts for $0.29, and buy the January 19, 2013 expiring $29 puts for $0.19. The net credit, ex-commissions, is $0.10 per contract, a 10.00% return on your money in 45 days. That is an 81.11% annualized return as long as the stock is not trading 11.92% lower on expiration than where it is today.

Medium-term: Sell the July 20, 2013 expiring $27 puts for $0.96, and buy the July 20, 2013 expiring $25 puts for $0.62. The net credit, ex-commissions, is $0.34 per contract, a 17.00% return on your money in 227 days. That is a 27.33% annualized return as long as the stock is not trading 20.73% lower on expiration than where it is today.

Longer-term: Sell the January 18, 2014 expiring $25 puts for $1.35, and buy the January 18, 2014 expiring $20 puts for $0.50. The net credit, ex-commissions, is $0.85 per contract, a 17.00% return on your money in 409 days. That is a 15.17% annualized return as long as the stock is not trading 26.60% lower on expiration than where it is today.

AngloGold Ashanti (NYSE:AU)

Short-term: Sell the January 19, 2013 expiring $28 puts for $0.55, and buy the January 19, 2013 expiring $27 puts for $0.40. The net credit, ex-commissions, is $0.15 per contract, a 15.00% return on your money in 45 days. That is a 121.67% annualized return as long as the stock is not trading 7.77% lower on expiration than where it is today.

Medium-term: Sell the July 20, 2013 expiring $23 puts for $0.80, and buy the July 20, 2013 expiring $21 puts for $0.55. The net credit, ex-commissions, is $0.25 per contract, a 12.50% return on your money in 227 days. That is a 20.10% annualized return as long as the stock is not trading 24.24% lower on expiration than where it is today.

Longer-term: Sell the January 18, 2014 expiring $23 puts for $1.60, and buy the January 18, 2014 expiring $18 puts for $0.70. The net credit, ex-commissions, is $0.90 per contract, an 18.00% return on your money in 409 days. That is a 16.06% annualized return as long as the stock is not trading 24.24% lower on expiration than where it is today.

Goldcorp (NYSE:GG)

Short-term: Sell the January 19, 2013 expiring $34 puts for $0.54, and buy the January 19, 2013 expiring $33 puts for $0.40. The net credit, ex-commissions, is $0.14 per contract, a 14.00% return on your money in 45 days. That is a 113.56% annualized return as long as the stock is not trading 10.10% lower on expiration than where it is today.

Medium-term: Sell the July 20, 2013 expiring $28 puts for $0.94, and buy the July 20, 2013 expiring $26 puts for $0.67. The net credit, ex-commissions, is $0.27 per contract, a 13.50% return on your money in 227 days. That is a 21.71% annualized return as long as the stock is not trading 25.97% lower on expiration than where it is today.

Longer-term: Sell the January 18, 2014 expiring $25 puts for $1.17, and buy the January 18, 2014 expiring $20 puts for $0.52. The net credit, ex-commissions, is $0.65 per contract, a 13.00% return on your money in 409 days. That is an 11.60% annualized return as long as the stock is not trading 33.90% lower on expiration than where it is today.

Van Eck Global Market Vectors Gold Miners ETF (NYSEARCA:GDX)

Short-term: Sell the January 19, 2013 expiring $41 puts for $0.44, and buy the January 19, 2013 expiring $40 puts for $0.33. The net credit, ex-commissions, is $0.11 per contract, an 11.00% return on your money in 45 days. That is an 89.22% annualized return as long as the ETF is not trading 11.88% lower than where it is today on expiration.

Medium-term: Sell the June 22, 2013 expiring $36 puts for $0.94, and buy the July 20, 2013 expiring $34 puts for $0.68. The net credit, ex-commissions, is $0.26 per contract, a 13.00% return on your money in 199 days. That is a 23.84% annualized return as long as the ETF is not trading 22.63% lower than where it is today on expiration.

Longer-term: Sell the January 17, 2015 expiring $35 puts for $3.75, and buy the January 17, 2015 expiring $25 puts for $1.18. The net credit, ex-commissions, is $2.57 per contract, a 25.70% return on your money in 773 days. That is a 12.14% annualized return as long as the ETF is not trading 24.78% lower than where it is today on expiration.

Closing Thoughts

As you decide whether to go with a short-, medium-, or longer-term position in your portfolio, keep in mind that although annualized returns on the shorter-term trades can look very enticing, you will only realize those returns over a 12-month period if you are able to repeat them. Also, remember that with the longer-term options, you are able to build further out-of-the-money credit spreads while still realizing double-digit returns. By going further out-of-the-money on the strike prices you choose to buy and sell, you are able to shelter yourself from larger drops in the stocks/ETF.

Source: Boost Your Gold Miners Returns With This Strategy

Additional disclosure: I am also long NEM and AU bonds.