Schaeffer's Outside the Box Blog
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The growth in Exchange Traded Funds (and options on those ETFs) has enabled investors -- traders -- to participate in a securities account with what were previously largely commodity market plays. ("Trader" is a more apt description of those with a disciplined plan, as opposed to those who will only exit when forced to by the markets). These days, almost every futures contract has an ETF, but these funds often lack the leverage advantage.

SPDR Gold Trust (ETF) (NYSEARCA:GLD - 152.83), for example, represents 1/10th of an ounce of gold per share. The cost is more modest than the metal itself (though at $152 it is not exactly cheap), and it trades much like a stock for retail investment.

This GLD direct play has advantages over individual gold miners, as it is not as subject to earnings, downgrades, accounting issues, or corporate mishaps. Nothing is more frustrating than having a stock NOT follow a trending sector because of individual mis-management.

An ETF can be bought or sold anytime during stock market hours, with liquid options available for many of the newly popular instruments. These are new-fashioned mutual funds, so to speak, with opportunities for short- and long-term investment horizons.

Option Plays

Each standardized GLD option represents 100 shares to control a grand total of 10 ounces of gold. The cash value of $16,000 ($1600 per ounce times 10 ounces) for an option play steps up the leverage power.

Long options represent the positives of leverage with completely limited risk. When you buy an option, the maximum risk is the premium paid, no matter how badly the underlying performs. The absolute worst-case scenario is the long option expires worthless. Upsetting, but not catastrophic… Predetermined maximum risk and unlimited multiplied rewards make buying options a very powerful trading tactic.

Commodity Option Super Leverage

A COMEX Gold Futures contract set at 100 ounces has a cash value around $160,000 based on current prices. That represents TEN TIMES the Leverage of the ETF options, but that is just the beginning.

Additional market hours nearly round the clock react efficiently to whatever happens in the dynamic financial world. This digestion of global events into commodity prices immediately makes for greater efficiency and better execution of a disciplined trading plan versus potential up-and-down gaps in equities.

Gold Futures Options

The Super Leverage advantages occur with the purchase of Gold Options for hundreds of dollars per contract. A $1,500 option that controls that $160,000 worth of Gold has over 100 times leverage.

Each dollar in the gold option premium price equates to $100 (click to enlarge an option chain for GOLD).

Click to Enlarge

A bull call spread for December expiration (November 27) -- futures options expiration varies and is not the third Friday of the month -- caps upside potential but can be significantly lower than the outright premium cost.

A December gold $1650/$1700 call spread was approximately $1,450 with the individual option premiums at $57.80 and $43.30, respectively. The maximum spread value is $5000 (so a profit of $3,550) if prices are above $1700 at expiration. Financial risk is absolutely limited to the premium paid.

Commodity options for crude oil, corn, sugar, cattle, as well as financial-futures options in 30-Year Treasury bonds, Japanese yen, Canadian collar, etc. offer direct option plays.

Options provide options in any market, with super leverage advantages found the commodity option way!

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.


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