Thursday, September 12, 2013

Sell GLD (cover puts)

I cover short Sep 120 GLD puts @128.2.
Gold is plunging this morning, and I am overexposed. I net a 55% profit based on the option price, which is more like 0.2% factoring in the margin requirements for selling short puts. 
I am undecided on the other layers of the short strangle for now. Gold is at the 50 day moving average, but technical levels may not provide much support if some big sellers want out. Only in hindsight will I know what the most profitable course is. In the meantime, I can look at the odds, the chart, and make a reasonable decision.

I am still net long gold. Just a couple of days ago, I was feeling smug about my gold positions, how quickly the market can again teach me to be humble.

/edit to add: Let me plug in some numbers for an example. I'll may up a stock, XYZ corporation, with a price of 100. Say I sold the XYZ Oct 90 put for 50 cents with five weeks until expiration. After holding for a couple of weeks, I close the position at 25 cents. So the profit on each contract is $25 less any commissions. The option buyer takes a straight 50% loss. The option sell can report that as a profit. However, typical $1000 (or about 10%) is required as margin to sell the put. This makes the return on capital more like 0.25% not the more exciting 50%. 

The most common scenario is that I hold until expiration and get 100%, though it might be more like 0.5% or 1% return on capital. Sounds terrible? Well, these are 80% to 90% probability trades. Compound 1% several times a year, and all those small fish make a meal.

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