This Income Trade Could Multiply This Gold Stock's Dividend 16-Fold

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The most recent Federal Reserve meeting stirred up a good bit of speculation among precious metal investors.

While the understanding was that the central bank was on a trajectory of curtailing its bond-buying program and eventually allowing interest rates to rise, Fed Chairman Janet Yellen's comments caused some uncertainty.

Yellen indicated the Fed would likely keep rates at the current target rate between zero and 0.25% for an extended period of time after the end of the central bank's bond-buying program. This caused precious metal prices to spike, along with share prices for precious metal miners, as continued low interest rates will be more likely to spark inflation.

Since Yellen's statement, other members of the Fed have spoken up, sending mixed messages to the market. In particular, St. Louis Fed President James Bullard said the Fed could raise rates in the first quarter of 2015.

With so many different opinions on what the Fed will do, investor uncertainty is rising. This is great news for us as option sellers, because with more uncertainty comes higher option premiums.

Today, we will use a put-selling strategy to benefit from the rally in gold stocks, generating an attractive level of income with the outside chance of owning a strong mining stock at a discount to the current market price.

Goldcorp (NYSE: GG ) is a blue-chip gold miner with one of the lowest production costs in the industry. Last year, the company was able to mine gold for an all-in sustaining cost near $1,000 per ounce. This low cost of production allows for a profitable operation even in periods where gold prices are under pressure. And, of course, if gold continues to rally, the company will naturally see its profit margins widen.

As you can see in the chart below, GG moved sharply higher following Yellen's remarks, and over the past week, the stock has held its gains nicely, despite the conflicting statements from Bullard.

Goldcorp pays out a monthly dividend of $0.05 per share, which brings the annual yield to 2.2%. This makes it attractive to income investors who are searching for yield in this low-rate environment. But using a put selling strategy, you could generate nearly 35% a year.

Specifically, I want to sell the GG Aug 28 puts with a limit order of $1.15 to ensure we get an attractive level of income.

By selling these put options, we are accepting an obligation to buy 100 shares of GG per contract at the $28 strike price provided that the stock is trading below this level when the puts expire on the third Friday in August.

Since we're receiving $1.15 per share from selling the puts, our net cost will be $26.85, which represents a nice discount to the current price. Therefore, we will need to set aside $2,685 per contract, plus the $115 in option premium, in case shares are assigned.

If GG continues its advance and closes above $28 on Aug. 15, the puts will expire worthless and we will simply keep the $115 per contract with no strings attached. The $115 in income would represent a 4.3% return on the $2,685 in capital set aside in 45 days. This nets out to a per-year rate of return of 34.7%. That's nearly 16 times as much as the stock's annual yield.

Put another way, by selling puts, you could boost your annual income by 1,477% over the traditional dividend investor.

Of course, there is always a risk that GG could trade lower. The company is scheduled to report second-quarter results on July 31, which is well before our puts expire. Any bad news could potentially push shares lower.

However, we're coming out of a period where investors have had very low expectations for precious metal mining companies. As such, much of the risk appears to already be baked into the share prices, with the potential for any good news to kick off even more of a relief rally.

Action to Take --> Given the attractive premium we can capture from the put contracts and the improving environment for gold miners, this looks like an excellent spot to begin generating more income from these rebounding stocks. Plus, if we are assigned shares, we will be eligible to receive the monthly dividend payments and have the opportunity to sell covered calls to earn even more income.

This article was originally published at ProfitableTrading.com:
Earn 1,477% More Than Dividend Investors on This Blue-Chip Gold Miner



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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