A Beautiful Gold Trade – Part 3

Here's the filled order for the Newmont Mining gold trade showing the specific stock option calls and puts I sold

I recently sold a great gold mining stock at a 125% gain because I wanted to find a better gold stock that paid dividends.  I settled on Newmont Mining Corp (NEM) because it was well established company and paid in excess of 3%.

The stock was well priced at $43.34 a share and I could have just bought it out right.  But instead, I sold $42 put options on it for $112.

This means i the stock goes to $42 or below, I must buy the shares at $42, and I keep the $112 premium.  So I get the stock at a cheaper price and am paid money for this privilege.

So that covers what will happen if the stock goes down over the next two months.

If the stock does nothing, I don’t get to buy the stock, but I still keep the $112 premium.  So that has a good outcome as well.

But what if the stock goes up?  Well, I would still get to keep the $112 premium – so that has a good outcome as well.  But I might have a bit of remorse that I didn’t buy the stock, and thereby missed out on the profits of a stock I wanted to buy.

So I used part of the $112 premium to buy a March 45 call option for $86.  All that really means is that I got someone to contractually agree to sell me the shares at $45 if the price went up in the next two months.

So if for some reason, the stock takes off, I won’t have any remorse because I will profit on the trade.

Now actually what will happen is the if the stock starts moving up, my call option that I bought will start becoming more valuable and I can just sell it for the higher option price.  And indeed, within eight days of putting on this trade, the option had increased 76% from what I paid for it because Newmont shares started going up.

We’ll watch this trade together as I keep you posted on how it is working out.  But I think you can see how the trade offers much better odds of success than if I had just bought the stock outright.

So to summarize, if the stock goes up, I make money.  If the stock stays the same, I make money.  And if the stock goes down, I make money AND get to buy it at a discount.

There’s not much else a stock can do, is there?  A stock will either go up, stay the same, or go down.  Looks like we make money in all three situations.  Which is why I call it a beautiful gold trade.

So what’s the risk?  Well, if Newmont stock was to really drop in price fast, let’s say down to $38 a share, I would be obligated to buy it at $42, and would lose money.  But that is no more risk than if I had just bought the stock outright and it dropped to $38 a share.

So that’s the beauty of this gold trade in that it offers more opportunities to profit and / or price advantages.

As of this writing, the price of Newmont stock has moved up and I am in profits.

I’ll keep you posted as the trade develops.

To your health and prosperity – John



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