A Better Way to Own Gold

This program does not trade it buys and holds gold using option collars to objectivity define risk. To emphasize the importance of using collars I’m comparing 2 positions owning gold from 2008 through 2021.

The blue line represents a $50,000 buy and hold investment in gold controlling one, 100 ounce contact from January 2008 through December 2020.

The green line a $50,000 buy and hold investment in three 100 ounce gold contacts from January 2008 through December 2020 using monthly option collars to objectively define risk.

 

 

Performance Summary January 2008 through December 2020

Buy & Hold Account (No Collar) Collared Buy & Hold Account
Cumulative Net $105,395.40 Cumulative Profit $253,136.47
Worst Drawdown Fed-Sep 2018 ($54,955.50) Worst Drawdown Oct 2012- Dec 2013 ($8,694.06)
Average Per Month $671.31 Average Per Month $1,612.33
Average Per year $8,055.70 Average Per year $19,348.01

 

 

Buy & Hold Account (No Collar)
Collared Buy & Hold Account 
Cumulative Net $105,395.40 Cumulative Profit $253,136.47
Worst Drawdown -$54,955.50 Worst Drawdown -$8,694.06
Average Per Month $671.31 Average Per Month $1,612.33
Average Per year $8,055.70 Average Per year $19,348.01

Contract Information

100 ounce Gold contacts are traded at the Chicago Mercantile Exchange, each $1.00 change in price =$100.00 per contact see this link for contact specifications.

The margin requirement to control a 100 ounce gold contact is generally 5.00% of contact value rounded up to the nearest $1,000.

With rates near zero carrying charges on margined amounts are nearly nonexistent. To calculate the margin rate open this quote page, subtract a nearby delivery month from one a year out, example February 2022 – February 2021= $14.00 or 0.75% annually.

Bid/ask spreads and all fees cost less than $25.00 per 100 ounce per contact.

Objectively defining risk on every trade.

We use collars, a collar is nothing more than selling an out of the money option against your position and using the collected premium to buy an out of the money option to define your risk, a collar should be “time premium neutral” meaning you’re collecting as much money on the option you’re writing as you’re purchasing to define your risk.

In the example below I’m long Gold at $1828.90 per ounce, I’ve written a call against my position $36.10 out of the money at $1865.00 expiring in 35 days collecting $7.00 in time premium ($700.00 per contract) . Using the $7.00 in collected premium I’ve purchased a put $33.90 out of the money at $1795.00 for $6.90 ($690.00 per contact) collecting $0.10 per ounce ($10.00 more per collar than I paid out).

Possible outcomes

    • Market moves hard against us.
    • Market settles above the put and below the call at expiration in 35 days.
    • Market moves in our favor.

Market moves hard against us
(2 minutes 15 seconds, click on video to pause at anytime)

Market settles above the put and below the call at expiration.
(1 minutes 29 seconds, click on video to pause at anytime)

Market moves in our favor
(1 minute 31 seconds, click on video to pause at anytime)

Simplified example of how to define a collar

 

 

 

Published by

Asset Investment Management

Family Office, Advisors