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