Gold – Not the end, but possibly a correction
Posted on: Nov 24th, 2009 | By Karim Rahemtulla | Filed under Featured, Financial News
Karim Rahemtulla, options expert at Investment U, looks at the near term potential of a gold correction, and how options plays could help maintain a positive portfolio.
Karim Rahemtulla (Investment U):
Of all the great investments you could have made in 2009, gold is right up there among the best of them.
The price of gold has surged this year, taking gold shares upwards with it. Readers of my Xcelerated Profits Report have rung the register with 45% profits on Goldcorp (NYSE: GG) and a triple-digit winner on Golden Star Resources (NYSE: GSS). We’re also up big on Yamana Gold (NYSE: AUY) at the moment.
All is good, right?
On the surface, perhaps. But not if you believe what the options market is saying…
Yamana Options Signal a Share Price Drop
Using Yamana as an example, the options market is betting that over the next 12 months or so, Yamana may fall from current levels of around $13 back into the single digits again.
Just take a look at the January 2011 $7.50 put options (the right to sell Yamana shares at $7.50), currently trading at $0.70 cents per contract. This means the put buyer thinks Yamana’s price will fall to $6.80 – almost 50% below current levels – in order to be in the money. The $6.80 price is derived from subtracting the price of the option from the strike price ($7.50 minus $0.70 = $6.80). This tale is similar across other gold shares, too.
These put options are expensive relative to Yamana’s share price – the result of gold prices moving sharply in previous weeks and causing the volatility in gold stocks to increase.
As a quick refresher, the price of an option is based on four major factors:
The price of the underlying shares
The options strike price
The time to expiration
The volatility of the underlying shares
Two Ways to Play Gold Prices… But Only One Viable Option
So if you’re a gold investor looking to participate in the market, what can you do to protect your profits, or buy shares at a lower price? Here are two potential ways…
Click here for the rest of Mr. Rahemtulla’s Analysis at Investment U.
Karim Rahemtulla is one of the country's foremost specialists in options trading, and, along with Executive Director Julia Guth, a principal founder of Mt. Vernon Research, as well as the founder and editor of Strategic Income, The 400 Report and The Smart Profits Report. Over the past three years, his options strategies have cashed in winners more than 70% of the time. Karim is also an editor of Mt. Vernon Research's Xcelerated Profits Report, a monthly newsletter devoted to making money using the safest stock and option strategies to reap great returns. An internationally renowned options trader who's been dubbed a "Market Maven" by CNBC, Karim also sits on the Advisory Panel for The Oxford Club, and is a frequent contributor to The Oxford Club Communiqué. Karim was educated in England, Canada, and the U.S. and is fluent in several languages. He travels the world regularly to find the best investment opportunities for our members.