How To Generate Income From Gold Stocks

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With markets looking increasingly volatile, investors might be interested in looking at safe-haven investments. Safe haven investments are used by investors when they are concerned about economic or political risks in the market.

The most common safe-haven investments are gold and bonds. These assets have the potential to outperform stocks during equity bear markets, which could potentially be just around the corner.

Gold investing can be done on via the Spdr Gold Shares ETF (GLD), which aims to match the performance of the price of gold bullion.

This gold ETF has seen a return of +0.58% in the last 6 months, which is a lot better than most equities. Unfortunately for income investors, the GLD ETF does not pay a dividend.

Thankfully, as sophisticated investors, we can generate an income from holding GLD by using options. The strategy is a known as a covered call which involves selling call options against a stock position.

Let’s take a look at the Barchart Covered Call Screener for GLD:

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GLD Covered Call Example

Let’s evaluate the first GLD covered call example. Buying 100 shares of GLD would cost $16,962. The August 19, 188 strike call option was trading yesterday for around $0.44, generating $44 in premium per contract for covered call sellers.

Selling the call option generates an income of 0.26% in 51 days, equaling around 1.86% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 188?

If GLD closes above 188 on the expiration date, the shares will be called away at 188, leaving the trader with a total profit of $1,862 (gain on the shares plus the $44 option premium received).

That equates to a 11.10% return, which is 78.1% on an annualized basis.

That particular covered call allows for a lot of capital appreciation. What if an investor was more income focused? They would need to sell a call much closer to the stock price (look for a low value in the Moneyness column).

Instead of the August 188 call, let’s look at the August 180 call (third row from the bottom).

Selling the 180 call option for $1.09 generates an income of 0.69% in 51 days, equaling around 4.62% annualized.

If GLD closes above 180 on the expiration date, the shares will be called away at 180, leaving the trader with a total profit of $1,127 (gain on the shares plus the $109 option premium received).

That equates to a 6.8%% return, which is 47.8%% on an annualized basis.

Of course, the risk with the trade is that the GLD might drop, which could wipe out any gains made from selling the call.

Barchart Technical Opinion

The Barchart Technical Opinion rating on GLD is a 72% Sell with a Strengthening short term outlook on maintaining the current direction.

Implied volatility is quite low at 15.57% compared to a 12-month low of 12.57% and a 12-month high of 30.89%. Some traders may prefer implied volatility to be higher before starting a covered call trade.

Gold investing can provide a hedge against inflation and geopolitical risks, but the returns can be unattractive for income investors without a dividend payment. Thankfully, you now know how to…

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