Fri Sep 15, 2006: Selling Gold Put Options (RGLD, GRS, GG, TRE)

After a bounce in the price of gold from below $600 per ounce to nearly $650, it's fallen back below $600 again, creating some opportunities to sell puts on gold mining stocks at lower strike prices. This can provide income with more safety plus the possibility of purchasing these stocks at even lower prices.

Royal Gold (NASDAQ-RGLD, 27.19) is down 35% from its 52-week high.

Gammon Lake Resources (AMEX-GRS, 11.11) is down 40%.

Goldcorp (NYSE-GG, 22.94) is down 45%.

Tanzanian Royalty Exploration (AMEX-TRE, 4.55) is down 50%.

The table below shows the option income available from selling naked puts on these stocks at example strike prices, as well as the effective purchase price should the put options be assigned.

For example, selling a RGLD January 2008 put option with a strike price of 25.00 at $400 per contract for 100 shares will result in a net purchase price of $21 per share if the put option is assigned to the seller (exercised by the buyer) forcing the option seller to purchase 100 shares at $25. If this put is not assigned, the income from the option expiring worthless is 19% based on the seller depositing enough cash in advance to cover that cost (a "cash-covered" put write):

$400 / $2100 = 19.0%

If the put option was sold in a margin account the broker would typically require less than 100% of the net purchase cost to be set aside, thus the actual income percentage could be much higher. The yields shown here are just for comparison purposes among the different options listed.

Also consider that the different options in the table have different expiration dates, so when comparing the yields you might want to count up the number of months until expiration.

Until next time, best of luck with your option investments!