Gold can have a valuable place in every investor’s portfolio, especially in times of economic uncertainty.
As an asset class, gold can also provide a hedge against inflation, which seems to be rearing its head.
Today, I want to share a strategy where you can use options to gain exposure to gold without having to physically gold bars. We’ll use the SPDR Gold Shares ETF (GLD) for our example.
The strategy is called a synthetic long stock and it involves selling an at-the-money put and buying an at-the-money call.
GLD Synthetic Long Stock Trade
With the ETF trading at 172.69, traders could sell a January 2022-expiring put with a strike of 175 for around $10.25 and buy a January 175 call for $7.80.
Therefore, this January 2022 synthetic long stock trade would generate a credit of $2.45 per contract, or $245 in total.
A synthetic long position has a similar exposure to owning 100 shares of the underling ETF. That exposure would cost about $17,269 if the investor bought 100 shares of the GLD ETF.
Despite the fact this trade can be placed for a credit, the exposure is still large given the inherent leverage in the options.
Even though the option trade generates $245 in premium, the investor could still lose $17,255 if the GLD ETF went to $0.
Exposure To GLD ETF With A Fraction Of Cost
The advantage of the trade is that an equivalent exposure to owning 100 shares can be gained for only a fraction of the cost.
For this synthetic long position, the margin requirement would be around $2,800, so the investor could use the leverage power of options to trade multiple synthetic long positions with the same amount of capital required to purchase 100 shares.
Of course, leverage is a double-edged sword, and if the ETF drops, losses will be magnified.
This strategy can be used on any stock or ETF, not just a gold ETF. Just be careful to watch your exposure and not take on too much leverage.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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