Is Gold Roller-Coaster A Safe Ride?

Last week, I closed my Yamana Gold (AUY) April 2011 $13 covered call position at $0.22 per contract with the stock trading at $12.80, near its strike price. By week’s end, AUY traded up to $13.30, justifying the trade for the time being. I initially opened this position at $0.47 late last year so a realized premium of 1.7% was collected against my AUY holdings. Buying back the call options allows me to retain my AUY position and continue to take advantage of something frequently advertised as the one of the gold sector’s main risk — massive volatility.

Volatility is a familiar term due to the rising popularity of options trading and the market’s crash in 2008/2009, which spiked the VIX index to previously unimaginable heights. When discussing the gold/precious metals sector, investors are often encouraged to bring “a strong stomach” to withstand the ups and downs of gold’s roller-coaster ride. In this case, a roller-coaster may be a perfect analogy. Most folks visiting an amusement park gladly get on roller-coasters, expecting spills, thrills and ultimately, a safe exit. In the world of investing, nothing is ever guaranteed but uncertain times and easy monetary policy suggest the gold roller-coaster may still be a safe ride.

Instead of fearing the sickening volatility of the gold sector, investors can use options to harness these price swings to their benefit. Options trading can get quite exotic, with a whole bevy of Greek letters and formulas awaiting, but a few basic principles and a conservative strategy has served me well.

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