MILESCFA

Will Gold Continue to Shine? A Bullish Option Strategy

I put on several similar LEAP verticles in stocks near the mkt lows. While the market makers were more than willing to trade the other side when they needed negative Delta, I have had a hard time exiting the trades. I assume that market makers can easily buy Delta because of the huge numbers of people selling calls against long positions, so trading out of my positions have been difficult.

I'm not sure if this applies to gold, but you should be aware of the potential illiquidity. Nonetheless, this can be a good strategy but I prefer to employ it when an asset experiences a significant drop in price. Otherwise you have to be very bullish (I'm not wild about the option pricing models, but this strategy currently has about a 20% probability of expiring in the money, so getting out is a critical aspect since there's a 42% chance it will trade above break even and an even greater chance of entering profitability prior to expiration).

Doubleguns+, I hesitate to comment because most people don't handle criticism (esp. gold bugs), even if constructive; however, to say it "might become worthless" and the physical asset will "almost never become worthless" shows a lack of understanding that this is a leverage play (as are all options). If you want to risk the same $370 in GLD vs the #1 option play, you can buy 4 GLD shs, so to make the same $2630 in the "physical asset", GLD would have to go to ~750 (equates to gold at $7,500).

Thus, this option play is a high leverage and therefore high BUT LIMITED risk strategy. Liquidity should be a crucial concern, since it'll probably trade into a profit.

(NOTE: A friend of mine trades in the S&P futures pit and owned puts prior to the 1987 20% crash; he was MAD because no one would offer him anything near the value of his puts... they were TOO DEEP in the money, hence they were TOO ILLIQUID).