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Monday, June 8, 2009
THE STRIKING PRICE
A Late-Stage Play on Gold
By STEVEN M. SEARS
Gold's high, but investors might capture more value yet – with call spreads.
IF YOU THINK OF THE Weimar Republic or Zimbabwe when the subject of the
United States economy arises, read on.
If you are so bullish as to harbor no doubts about the stock rally's
sustainability, consider buying Standard & Poor's 500 calls and futures,
preferably on margin and hedged with a bucket of Lotto tickets paid for with
a home-equity loan. Don't read on. Good luck, and Twitter me pictures from
Vegas.
But for investors worried about inflation, it still isn't too late to
consider gold. True, the exchange-traded fund SPDR Gold (ticker: GLD) is
near a 52-week high, but an options-trading trick makes the position more
than manageable, even as fear of inflation and a possible devaluation of the
dollar make the gold trade more crowded than a Manhattan subway car during
rush hour.
The sweat of the sun -- what the Incas called gold -- is an inflationary
haven, though timing is everything as traders confess to having little idea
whether inflation will begin in six months or two years.
Expectations are so high in the options market that gold prices will surge
-- rather than continuing to merely grind higher -- that the implied
volatility of GLD's out-of-the-money calls has spiked. The astute Sveinn
Palsson, a Credit Suisse derivatives strategist, is telling clients to
consider GLD "1x2" call spreads to profit from currently high implied
volatility in out-of-the-money calls, and future price gains in gold.
[cboe]
Palsson likes buying a January 100 call, and selling two January 120 calls.
Selling two calls lets investors monetize the "steep skew," or elevated
implied volatility of GLD's out-of-the-money calls. The strategy also lets
investors benefit if GLD's price jumps to $120 by January; Friday afternoon,
it was around 94. The risk, and it could be a big one, is that you are
buying one call, and selling two, and the "uncovered call" could lead to
losses if GLD's price shoots past $120 and the call hasn't been "covered."
THE DAYS OF SUPERCHARGED exchange stocks are over, but a Chicago Board
Options Exchange stock sale could prove exciting enough to raise the dead.
The top U.S. options mart is the last major independent exchange, and its
proprietary S&P 100 and 500 Indexes and Market Volatility Index (VIX) are
among the world's most actively traded options.
For years, a CBOE stock deal was impossible, owing to unusually contentious
litigation with some Chicago Board of Trade members over ownership
interests. (The CBOE opened in the CBOT's smoking lounge in 1973.) But a
Delaware court just approved a proposed settlement. If not appealed in 30
days after the judge issues an implementation order, it will free the
member-owned CBOE to "demutualize" into a stockholders' corporation.
Some insiders think this could happen by year end, only to be followed by a
merger or stock sale in 2010.
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E-mail: steven.sears@barrons.com
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