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
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
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
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
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
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
Earn 1,477% More Than Dividend Investors on
This Blue-Chip Gold Miner
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