From the department of “time flies” – back in October of 2009 I wrote a post titled “Will Gold Break $1250 by 2011?” At the time, gold was trading for $1034, and many people were saying they expected it to go still higher. Now, I wasn’t a believer, I made that clear, but for those who were, I offered a way to make 4X on their money (a 300% return) over the next 15 month through an options spread.
Allow me to recap the strategy. First, gold is traded as an ETF priced at 1/10 the price of one ounce of gold. The above snapshot is from October 2009 when I wrote the first article. Now, a brief explanation of options. An option gives you the right but not the obligation to buy the underlying stock at the strike price you choose. For example, $1450 gives you the right to buy 100 shares (options are priced per share but trade 100 at a time) of GLD until Jan 21, 2011 for $100/share. If GLD rose to $120, your $1450 would rise to $2000. Make sense? At $120 you would make the profit from the $100 strike to the $120 current price, a $20 gain or $2000 for the contract. For this play, however, I suggested buying the $115 strike for $9.50, and selling the $125 strike for $7.10. This way, you are out of pocket $2.40 but can gain watch that $2.40 rise to as much as $10 as GLD goes to $125 (or gold to $1250). Keep in mind, even at $120, this bet would have doubled your money. The downside is that if gold didn’t rise to at least $1150, the entire investment would be lost.
Really, it would have be sweet if I were a gold bug and claimed to put my money where my mouth was, putting up, say $25,000 and claiming it’s now $100,000. No such luck. But in the end, if anyone were so bullish on gold that they followed this strategy, they would have seen a 27% move in gold produce a 300% return on their money. Not bad. I believe gold is in bubble territory and there are similar trades that when the bubble bursts, there’s some good money to be made.