- GLD will break out of the recent trading range to the upside, moving above $162.00 a share. You can then exercise the call and buy the shares at that price – regardless of how high GLV's price might have moved above that level. (Alternatively, you can simply sell the call just prior to expiration.)
- GLD will again fail in its rally attempt, with the price turning lower and falling below $152.00 a share. The put will thus be exercised and you'll have to buy GLD at that price. That's a substantial bargain over what you'd pay if you merely bought the shares today – plus you'll be getting in just above the $151.00 support level established in the recent series of gold price swings. (Again, if you prefer, you can just buy back the put shortly before expiration.)
Either way, you'll have avoided a lot of anguish over when to buy and whether you've made the right decision.
Plus, as Table 1 illustrates, if gold prices rally substantially, you'll make almost as much profit as if you'd laid out the $15,725 to buy the actual shares in the first place – and your return will be much, much higher.
For example, if GLD climbed to $170 a share, you'd make $1,275 in profit, or 8.1% on the shares.
But, on the option combo, your profit would be $773 (the $1,275 reduced by the out-of-the-money amount of the call, and the cost of the combo) – a whopping return of 2,862.9% on your $27 outlay. Even if you consider the $2,620 margin deposit as part of the cost, the return is still an outstanding 29.2% – in less than two months.
Even better, if gold prices drop and GLD falls below $152.00 a share, your loss is actually $498 less than if you'd bought the ETF itself – simply because you avoid the entire decline from $157.25 to $152.00.
And, if gold merely sits there, staying in its recent range, your total loss is ... that's right, just $27!
This play can be used repeatedly until gold prices finally move out of their recent range. Note as well that the selection of option strike prices should involve a little more analysis than the generic guidelines offered here.
If you plan to seriously utilize this strategy with gold – or any other stock, ETF or futures contract – you should first examine a technical chart for the underlying security, then buy calls with strike prices just above primary resistance levels and sell puts with strike prices just above major support.
That way, if the options are exercised, you'll be buying the underlying security only on a confirmed breakout, or at a bargain point where the price is unlikely to go much lower.