Covered Call Trade on Gold

Closing out yesterday, stocks were soundly beaten amid growing fears of a global recession, as investors confronted a grim mix of U.S. economic data and fresh concerns about Europe’s banks.  In the flight to safety, investors piled into gold, which jumped to a new record of nearly $1,830 a troy ounce.  If you believe the trend in gold will be mainatined due to market uncertainty, why not look at gold for a covered call.  Why use a covered call when rather than go long gold?  The simple rationale is that gold has had a nice runup over the last few weeks and if the market views turn positive, then some of that money will come back into stocks and gold retraces or pulls back from current prices.  With this thought in mind, you may want to sell an in-the-money call to add some downside pretection.

The covered call can be placed on the gold ETF (GLD) which was upgraded by Ned Davis Research from 4 stars to 5 stars this week.  If you want to be more aggressive, you can do a covered call on the gold mimers ETF (GDX) with an in-the-money call.  The chart below shows the assigned returns at various strike prices for GLD and GDX.

Covered call trades on gold and gold miners
Click to enlarge

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