Another Angle on Gold

I've done pretty well on my last couple gold trades using the leveraged ETF DGP. Right now I don't see a great opportunity in the metal itself. It's back down near it's 120 day MA today, but that same moving average has rolled over and is now heading back down. While I'm certainly bullish on precious metals long term, until I see some confirmation of short term direction, I'm not interested in trading it.

That doesn't mean I can't make some money off gold though. Seabridge Gold(SA) is a cheap gold explorer. They have two massive projects in Canada and it's gold reserves are currently priced at around $23/ounce. That's just the gold. There is also plenty of silver and copper "byproducts." At those prices, even if the metal were to drop further, SA would most likely weather the storm better than the metal or some less-attractively priced gold companies. That's not all though, a good company like SA with reserve valuations this low could end up being a takeover target for another company. I'm going to sell puts again, but I'm going out a bit longer than normal.

• Sell to Open: 1 SA Jan 19 2013 20.0 Put @ $2.85

With only about $560 in margin requirements, this will come out to right about 50% returns if it expires worthless. If it drops below $20 and I have to buy the stock, my adjusted entry price would only be $17.15 and I'd own one of the best(and cheapest) gold explorers available.

The Numbers

• Cash: +$285
• Short Option: -$300
• Margin: -$560

Selling Risk in InterOil

InterOil(IOC) has been on a tear lately and finally gave me a chance a few weeks ago to get out of some underwater puts I'd been rolling for a while. That trade had been on since before this blog, so it's not part of the portfolio, but it was a very profitable trade if not a bit more risky than I maybe should have done. This time I'm going to give up some profit for a lot less risk.

• Sell to Open: 4 IOC Mar 17 2012 35.0 Put @ $0.30

This should be a quick trade. If IOC should happen to get hammered in the next two weeks and I buy at $35 I'm ok with that. There's a lot of controversy about IOC and it seems things are pretty well divided between bears who think the whole thing is a fraud and bulls who think it's a jackpot. I'm firmly in the bull's camp although I think it's going to be a volatile ride. That's why I'm able to get such good premiums on the options. $30 doesn't seem like much(and if my commissions weren't as cheap as they are, I couldn't do these trades), but with only about $400 in margin requirements per option, that's more than a 7.5% return in just two weeks. And with premiums as high as IOCs, I should be able to do this trade again and again.

The Numbers

• Cash: +$120
• Short Option: -$140
• Margin: -$1540

Gold Gets Hammered

Gold got smacked hard today and DGP closed well below my stop. That will happen when you're using a tight stop on a leveraged ETF. I'll close out my DGP trade in the morning. I will update this post after the trade is done.

Update:

Gold is bouncing a bit this morning which gave me a bit better of an exit point.

• Sell: 50 shares of DGP @ $56.08

I finish this trade with a gain of $5.22(10%) in about 2 months.

The Numbers

• Cash: +$2,804
• Long Stock: -$2,804

New Trades

Well I got the bounce in gold off support again so I'm still in that trade with another nice pop this morning. If I change my stop or close that trade I'll post again.

But today I put on a couple more trades, selling naked puts on a couple great stocks. The first one is Berkshire Hathaway, which I've traded before. In the Berkshire trade I wrote about how Buffett will always step up to buy at 1.1x book value. In the latest shareholder letter from Buffett, he talked again about buying at that level. Additionally, book value grew at 4.6% and is now right around $73/'B' Share(equal to 1/1500th of an 'A' Shares). Since I still feel like there's a lot of potential for short- to mid-term weakness, I'm going out a little farther.

• Sell to Open: 1 BRKB Jan 19 2013 72.5 Put @ $3.56

With about $1300 in margin requirements, this will net me 27% return in about 10.5 months.

The second trade is Annaly Capital Management(NLY). NLY is a mortgage REIT that deals only in agency-guaranteed loans. They just borrow money from the government at low(some might say artificially low) rates and use it buy mortgages that are guaranteed by Freddie Mac and Fannie Mae. Since they're a REIT, 90% of their earnings come back to the shareholders resulting in nearly a 14% dividend that's super safe. With the Fed promising to keep interest rates low until 2014, NLY will continue to bank big profits. It's a great stock that I've owned and traded in the past. I'm going to do a two-part trade on this one. The first will be a longer term out-the-money put mostly just to collect cash. The second will be a shorter term in-the-money put intended to get a stock position that I can use to collect dividends and sell covered calls against. If the stock rises above 17 and we don't get the stock, we'll just do it again and collect put premiums instead of dividends.

• Sell to Open: 1 NLY Jul 21 2012 16.0 Put @ $0.70
• Sell to Open: 1 NLY Apr 21 2012 17.0 Put @ $0.80

The Numbers

• Cash: +$506
• Short Option: -$515
• Margin: -$2000

Walmart

Walmart(WMT) is down about 4% after their earnings this morning. Still not quite a screaming value at $60/share, but I am going to take advantage to sell a put.

• Sell to Open: 1 WMT Jan 19 2013 55.0 Put @ $2.50

This will work out to 25% in just under a year. Worse case scenario, I buy WMT at $52.50 and collect dividends and sell covered calls on a rock solid company.

The Numbers

• Cash: +$250
• Short Option: -$255
• Margin: -$1000

Out of NETL

Gonna go ahead and close out the NETL arbitrage trade this morning for a nickel. This option didn't expire until April, so there was no point in tying up the margin for an extra $5.

• Buy to Close: 1 NETL Apr 21 2012 49.0 Puts @ $0.05

This trade produced nearly 15% on margin in just 4.5 months.

The Numbers

• Cash: -$5
• Short Option: +$5
• Margin: +$1000

Gold Update
My DGP gold position has been flirting with it's trailing stop the last couple days. If we don't get a bounce this afternoon or tomorrow it will likely break it's trailing stop(currently $56.53) and I will close the position.

Out of MSFT

The naked call I was holding against my Microsoft stock was exercised early(most likely someone chasing the dividend since yesterday was the ex-div date). Anyway, instead of trying to get back into this right now I'm just going to take my profits on this one and wait for a better chance. The option was exercised at $30 so that's a total capital gain of $4.59/share(18%). Additionally I received another $0.52/share in dividends and $0.42/share in option premium(that's including the $0.46 I lost when the shares were called away and I rebought) for a total gain of 21.8% in about 9 months.

• Sell 100 shares of MSFT @ $30.00

The Numbers

• Cash: +$3,000
• Long Stock: -$3,025
• Short Option: +$35

I will try and get back into MSFT if it drops back down in the next couple weeks.