Options trades for the precious metals

By HughK on Fri, Jul 19, 2013 - 10:23am

Hey All,

I have done a brief search of PeakProsperity and have not come up with much recent information on how to buy options contracts for gold and silver securities.

I realize that there is some major counterparty risk with options contracts, especially in the wake of a major financial meltdown, and I concur with most others here at PeakProsperity in that holding physical precious metals is the most conservative and resilient way to hold PMs.

However, I would like to allocate a modest amount of my savings capital to some call options on gold and silver securities, including a few ETFs and a few specific stocks.  

If anyone out there (JimH?) is willing to share any advice regarding options trading for PM securities, I'd be grateful.  Or, if there is already a detailed thread on this that I have missed, if you could include a link to it, it would be nice.

Specifically, here are a few questions I have:

1.  Is it better to buy in the money and pay more, or slightly out of the money and pay less for a 6-month to 2-year time horizon?

2.  Is it possible to buy options in the Sprott ETVs?  (PHYS, PSLV, SPPP)

3.  Is it possible to buy options for SILJ (a junior gold miner ETF)?

4.  Does anyone know how to buy options for smaller stocks, such as the many Canadian miners that are traded in Toronto or in the U.S. as either OTC or pink sheets?  (Example - Golden Queen - U.S. symbol GQMNF; Canadian symbol GQM.TO)

OK, if you are dead set against options, I'd be happy to hear that as well, but I'm really hoping to hear about strategies and how-to for trading options on precious metals, as most of my modest savings portfolio is invested very conservatively, according to PeakProsperity, and I'd like to put a bit of capital into a more risky but possibly more lucrative investment.

Thanks a lot!



davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5929
options trading

I'm against going long on options in general, simply because I have never had any success at all.  Push the button enough times and get shocked, I stop pushing that button.  Or as I heard it said, "How to make a small fortune in options: Start with a BIG fortune, and trade a lot."  Going long, I not only have to be right, I have to be right within a specific timeframe.  That's tough to do consistently.  And that option price decays away day by day.  Rust never sleeps.

That's why I prefer to go short.  Writing options I've had much better success, but its critical not to get too greedy.  I don't write more options than I have cash to cover them.  Being overleveraged does funny things to my head.  Best to avoid that situation.

One can write covered calls (safe), naked puts (dangerous if you write too many) and naked calls (very dangerous - unlimited exposure to loss).  I prefer to write covered calls against stock I own, and naked puts for stock that I don't mind owning, has been pounded down hard, with a high implied volatility, that is showing some signs of at least a temporary bottom.

Best thing about naked puts: if I write them at the tag end of a big move down, volatility is high, and even if the stock doesn't rebound but just moves sideways or even slightly downhill, my put write will make me money as I collect the decay from volatility as well as time.

But I never expect to get rich writing puts.  Put-writes aren't a lottery ticket.  In fact, writing puts is like selling lottery tickets to hopeful speculators.  Think of it as playing the house at a casino.


silverinvestor's picture
Status: Member (Offline)
Joined: Jul 21 2013
Posts: 6
Leveraged Investing

I also am against investing in options.  You are likely to loose money because: 1. Have to get the direction correct, 2. You have to get the timing correct, 3. You are competing against HFT and algorithmic trading, and 4. The price discovery mechanism is broken for metals in this environment of manipulation of gold and silver.

If you are dead set on using leverage, then I suggest you subscribe to David Morgans newsletter and follow him as he makes trades on the futures market and his recommendations on mining companies.  He has been around for decades and knows the miners inside out.   He gives a video of him actually making trades about once a month if I remember correctly.  The miners are a way to play leverage because they typically outperform the metal itself by 2 or 3 times.  The caveat is that the miners was a good game before the ETFs came along and sucked all the capital out from them.  They have done horribly even when the metal was doing well and there all kinds of games the miners play with hedging, cash costs, etc that isn't recommended for the faint of heart.

I personally played around with AGQ options and got burned so now I learned my lesson and only hold physical and gave up on leverage.  I think there will be many multiples of gains just on the physical if you can hold throughout the volitility and into the next coming financial crises.


HughK's picture
Status: Platinum Member (Offline)
Joined: Mar 6 2012
Posts: 764
Thanks Dave and silverinvestor

I will consider your words carefully as I decide whether to deploy a small share of my cash savings to options, PM stocks, more bullion, or keep it aside as dry powder, as Chris and Adam call it.  I have a friend who is an experienced options trader and I will also consult with him, but it may be that I just decide it's not worth the risk.

If anyone else has any advice or experience regarding options trading for PM securities, I'd love to hear it.



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