Gold on Sale?

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 4.3%

When was the last time you caught sight of an item displayed in a retail store or a catalog and thought: "Gee, I'd buy that if it ever went on sale"?

Perhaps you've noticed the discounts now being taken on gold. On Wednesday, the lead December COMEX contract settled near $1,030 an ounce, more than $40 off its recent peak.

COMEX/NYMEX Spot Gold Settlements

Is a 4% reduction enough to entice you to buy gold?

A lot of would-be buyers are waiting for bigger discounts. Those with a sense of history look at the December gold contract's track record and figure a pullback to the $1,009 level is needed to attract new buying interest. Those who feel the market's been more overwrought are eyeing a dip to $989 before sellers are washed out.

In either case, they're putting in limit orders just under these price levels to snag their anticipated bargains.

Now, the good thing about open limit orders is this: You get filled only if the contract is offered at or below your limit price. The order forces you to wait for your discounted sale price (don't you wish you could do this at Macy's?). No discount, no purchase.

That's also the bad thing about limit orders. If the market doesn't drop to your limit price, you're shut out. Well, shut out of an automatic purchase, that is. If you set $989 as your limit, only to see December gold dip to $1,009 before rebounding, your limit order remains unexecuted. If you wanted to be a gold futures buyer, you'd then have to consider canceling your limit order and purchasing futures at the market price.

There's no compensation offered for waiting around, hoping for further price concessions. Not directly through futures, anyway. There is a way to get paid, however, through the options market.

Suppose you'd sold short a December gold futures option with a $990 striking price. As you may know, the buyer of a put option obtains a right, but not an obligation, to sell (to "put") the contract's underlying asset to the put grantor at the exercise price. It's profitable for the put buyer to exercise the option when December futures fall below the $990 strike price. Until, and unless, futures decline below that threshold, the put seller has the advantage.

Why? Because she received the buyer's premium when the option was granted. Wednesday, the $990 December put settled at $5.70 an ounce, in essence offering sellers a $570 payment for a $990 limit order.

If the December contract never dips below the $990 strike by its expiration date, it will likely be abandoned by its owner, allowing the grantor to pocket the $570 premium as profit.

And the risk on the other side? Getting assigned a long futures contract if the market drops below $990. That was, however, pretty much the same risk anticipated by placing a regular limit order on December gold futures at the $989 retracement level.

Knowing this, the question for would-be gold buyers now becomes this: Do you want to get paid for bargain-shopping or not?

Comments

[pdtor:]

Yea, but what if gold spikes higher in this volatile market,then what?

Oct 30 08:53 AM

[optionsgirl:]

The Seller keeps the premium of the put option sold. If gold spikes higher, the buyer of the put won't exercise it.


On Oct 30 08:53 AM pdtor wrote:

> Yea, but what if gold spikes higher in this volatile market,then
> what?

Oct 30 09:23 AM

[kohalakid:]

Selling puts to accumulate positions is just about the greatest thing since the invention of the wheel. I've been doing it for 25 years.

Last week I sold Nov 1040 gold puts for a $3.70 per oz. They expired Oct 27 and since gold was 1039, I got the gold put to me. Then sold the gold yesterday at 1047.

Dec $1000 puts will expire in Nov 23 and are trading just over $4.00. Probably best to see if we get a bit more of a pullback in the spot price, then I'll be a good seller of the puts.

Oct 30 09:24 AM

[kohalakid:]

Then you keep the premium and write 'em again when the contract expires.


On Oct 30 08:53 AM pdtor wrote:

> Yea, but what if gold spikes higher in this volatile market,then
> what?

Oct 30 09:25 AM

[optionsgirl:]

Even if it spikes, you could also sell a call at 1100 or above, and take in more premium if you think it won't breach that price-you can play both sides at once.

Oct 30 09:30 AM

[Bruce Pile:]

I am new to options and I've just started reading books, including Cramer's two chapters on options in his new book, which are great. I've been running numbers and going through the option chains, but the more I look at it, the more I get the feeling that selling options is the easy way to make money with them. You are the casino as the seller; the more gamblers the better.

Selling puts to accumulate positions of interest sounds interesting. You buy the positions you want with filled limit orders at discount prices if your buyer cooperates or you take in a steady stream of risk-free sales if they don't. I have a dumb question for you experienced options people out there. If you are assigned the stock when the put is exercised, do you get to keep it until you want to sell it?

Oct 30 10:34 PM

[talld:]

I think gold is like baseball, everyone has an opinion on what the score should be. The institutions are still interested in gold, or the price would slip from what it is.

Oct 31 01:31 PM

[kohalakid:]

Yes, if you are assigned the position the stock is put in your account, you have to pay for it or put it on margin, and it's yours to do with as you please. Just as if you had entered a limit buy order at the strike price. My preference is to then write covered calls against it immediately!!


On Oct 30 10:34 PM Bruce Pile wrote:

> I am new to options and I've just started reading books, including
> Cramer's two chapters on options in his new book, which are great.
> I've been running numbers and going through the option chains, but
> the more I look at it, the more I get the feeling that selling options
> is the easy way to make money with them. You are the casino as the
> seller; the more gamblers the better.
>
> Selling puts to accumulate positions of interest sounds interesting.
> You buy the positions you want with filled limit orders at discount
> prices if your buyer cooperates or you take in a steady stream of
> risk-free sales if they don't. I have a dumb question for you experienced
> options people out there. If you are assigned the stock when the
> put is exercised, do you get to keep it until you want to sell it?

Nov 01 03:20 PM