The Buy Write Strategy For Playing The Gold Market

For those of you familiar with options, the strategy of buy write, where you sell calls on your existing holdings of Gold stocks or Gold Index shares, is a great way to keep your bullish positions but take some chips off the table if the market continues to rally. It also is a winning strategy if the Gold market trades sideways over the next few years-a likely event because of the tremendous gains seen in the previous few years.

How does it work?

Take the GDX-the Gold Miners Index share, for example. GDX includes all the major mining stocks of the world, and is a great way to play Gold. See more on GDX in my previous post here.

GDX trades at $39.50. The Dec 40 calls sell at $4.50. If you sell a call on a share of GDX, and GDX trades at or above $40, you gain 15% in 6 months, an excellent return. If the share closes below $40, you keep the shares intact, but walk away with a hefty premium.

Selling calls in volatile markets is very profitable if done intelligently-diversification in call selling is the key here. The introduction of ETFs has made this really easy-you can just buy shares of GDX or ASA and play the options to your advantage when market conditions permit and capture good returns.

The strategy doesn't work in 1) non-volatile markets like utilities and REITs, where options premiums are low, and 2) if you are bearish on the underlying.

I am bullish/neutral on Gold and Oil, and so far, this strategy of selling calls on GDX, ASA and OIH (OIH is the Oil Drilling Companies' Index shares) is giving great returns.

Sanjay John G.