The Value of Gold Advice

By Brad Zigler

I got chided Thursday morning. There's nothing new in that. I get my chops busted regularly. But Thursday morning's rip was more intriguing than most.

It seems a gentleman caught sight of an archived article from Oct. 29 ("Gold On Sale?") in which I likened short naked puts on gold futures to buy limit orders.

In a nutshell, I suggested a tactic that allowed investors looking to buy gold below the market price to get paid for simply lodging their purchase orders. Selling put options on December futures with a $990 strike price back then could have put as much as $570 in an investor's pocket. That's $570 just for agreeing to buy gold if the price dropped below $990.

So, why was I upbraided on Thursday? Well, the gentleman reader claimed my Oct. 29 article had "no value" for Nov. 12.

Well, that's not exactly true. There's still some value in those puts. They last traded at $10 - good news for sellers because they can now be bought back at a $560 profit.

Of course, sellers can still hold on to the put positions until the contracts expire a couple of weeks from now. Should December gold take a nose dive below the strike price by then, they could still end up owning futures. And that would be good news, too, since the sellers wanted to buy gold in the first place.

So, to our gentleman reader, I offer this: There are times - particularly when selling options - when investors should strive for diminishing value.

Comments

[mbkelly75:]

Selling put options is one of the few option plays I like and understand. It is a great way to get paid to buy something you want anyway - thus lowering your effective price. Please keep up the good work.

Nov 19 07:43 AM