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200519 GoldM

Investing with options: striking gold (GLD)

Options 10 minutes to read
Koen Hoorelbeke
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Investing with options provides a versatile toolkit for enhancing investment strategies. This article presents three option-based methods tailored for the SPDR Gold Trust ETF, offering bullion investors a range of approaches to capitalize on market conditions and manage risk with precision.

Investing with options: striking gold (GLD)

Gold has traditionally been viewed as a stable investment, often appealing to investors during times of economic fluctuation. Echoing this sentiment, recent analyses from my colleagues (see related articles mentioned at the bottom of this article) have presented a positive perspective on gold’s future performance. A key vehicle for participating in gold's potential upswing is the SPDR Gold Trust ETF, commonly known by its ticker, GLD. This ETF, where 1 share corresponds to 1/10th of an ounce of gold, is designed to reflect the performance of the price of gold bullion, minus the Trust’s expenses.

In this context, we will explore three practical strategies using options on the GLD ETF. Each strategy is designed to align with different market conditions and investor goals, ranging from conservative to more assertive approaches. This article aims to outline how options can be used with GLD to potentially augment an investment portfolio, providing a clear framework for each method.

2023-11-30-00-GLD-Chart

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

 

Bullish outlook

2023-11-30-01-GLD-Zebra

Bullish Outlook - Long Call Spread on SPDR Gold Trust (GLD)

  • Execution:
    • Buy to Open 2 21-Jun-2024 178 Call
    • Sell to Open 1 21-Jun-2024 189 Call
  • Premium and Risk:
    • Per share: $25.90 (debit)
    • Total premium paid: $25.90 x 100 = $2,590.00 USD
    • Max Risk: Limited to the total premium paid of $2,590.00 USD
    • Margin impact: 0 EUR
  • Breakeven Point: The breakeven point is at a stock price of $192.90 at expiration
  • Rationale: This trade is a bullish strategy known as a "Zebra". It involves buying 2 calls with a lower strike price (which costs more) and selling a call with a higher strike price (which costs less). By selling the call, you 'remove' the extrinsic value of the position, partially negating the theta-decay. As the delta of the trade setup is around 1, this means the position will appreciate in value 1-to-1 with the price of the underlying (if GLD goes up $1, this strategy will also appreciate approx. $1). The trader pays a net premium for the position. The aim is to profit from an increase in the price of GLD.
  • Stock vs Options Comparison: Unlike purchasing the underlying GLD shares, the options spread offers a leveraged position with a defined maximum risk (the premium paid).

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Neutral / range bound outlook

2023-11-30-02-GLD-IronCondor

Neutral Outlook - Iron Condor on SPDR Gold Trust (GLD)

  • Execution:
    • Sell to Open 1 21-Jun-2024 215 Call
    • Sell to Open 1 21-Jun-2024 180 Put
    • Buy to Open 1 21-Jun-2024 240 Call
    • Buy to Open 1 21-Jun-2024 155 Put
  • Premium and Risk:
    • Per share: $4.40 (credit)
    • Total premium earned: $4.40 x 100 = $440.00 USD
    • Max Risk: Limited to the difference between the strikes of the puts or calls minus the premium received, which is $2,060.00 USD.
    • Margin impact: 1,367.81 EUR
  • Breakeven Points:
    • Lower Breakeven: $175.60 (put strike price - premium received)
    • Upper Breakeven: $219.40 (call strike price + premium received)
  • Yield: Max Profit: Limited to the premium received of $440.00 USD. The profit is achieved if GLD stays between the two breakeven points at expiration.
  • Rationale: An Iron Condor is a market-neutral strategy that profits from low volatility in the underlying asset and time decay of the options. The goal is to have the price of GLD remain between the breakeven points until expiration.
  • Stock vs Options Comparison: The Iron Condor strategy capitalizes on a range-bound market where the trader does not expect significant price movement. It provides a limited profit potential with defined risk, contrasting with potentially unlimited gains or losses when holding the underlying stock.

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Bearish outlook

2023-11-30-03-GLD-CreditCallSpread

Bearish Outlook - Bear Call Spread on SPDR Gold Trust (GLD)

  • Execution:
    • Buy to Open 1 21-Jun-2024 200 Call
    • Sell to Open 1 21-Jun-2024 195 Call
  • Premium and Risk:
    • Per share: $1.85 (credit)
    • Total premium earned: $1.85 x 100 = $185.00 USD
    • Max Risk: The difference between strike prices minus the credit received = ($5.00 - $1.85) x 100 = $315.00 USD
    • Margin impact: 221.83 EUR
  • Breakeven Point: Breakeven at expiration: Sold call strike price + premium received = $195 + $1.85 = $196.85
  • Yield: Max Profit: Limited to the premium received of $185.00 USD. The maximum profit is attained if GLD is below the lower strike price (195) at expiration.
  • Rationale: The Bear Call Spread is employed when a modest decrease in the underlying asset's price is expected. It benefits from both the time decay of options and a decrease in the underlying asset's price.
  • Stock vs Options Comparison: Unlike shorting the stock, the Bear Call Spread provides a limited risk strategy with a defined maximum loss and profit.
2023-11-30-05-GLD-OptionsOverview
© barchart.com

Conclusion

In summary, we’ve explored three options strategies for GLD - a long zebra call, a short iron condor, and a bearish call credit spread. Each offers unique benefits and risks, providing a range of tools for different market scenarios.

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Related articles:

Previous "Investing with options" articles: 

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