In moments of economic ambiguity and market turbulence, investors often seek solace in safe-haven assets such as gold to safeguard their wealth and generate income.
Recently, gold has once again captured the attention of investors with the Spdr Gold Shares ETF (GLD) experiencing a robust increase of 12.73% over the past half-year.
Exploring Income Opportunities
Designed to mirror the price movements of gold bullion, the GLD ETF, unfortunately, does not offer dividends to income-seeking investors.
Fortunately, for savvy investors, generating income from holding GLD is entirely feasible through the strategic use of options. One popular method is the covered call strategy which entails selling call options against a stock position.
Let us delve into the Barchart Covered Call Screener for GLD:
Illustrative Example of GLD Covered Call
Consider the primary GLD covered call example where purchasing 100 shares of GLD would amount to $20,218. The call option for the September 20 at $220 strike was trading at approximately $3.35, resulting in a premium of $335 per contract for covered call sellers.
Striking a Balance
Initiating this call option trade would yield an income of 1.7% over 184 days, equivalent to around 3.34% on an annual basis. However, what if the ETF surpasses the $220 strike price?
If GLD closes above $220 on the expiration date, the shares will be exercised at $220, resulting in a total profit of $2,117 (comprising the gain on the shares and the $335 option premium received).
This translates to a 10.6% return, or an impressive 21.2% on an annualized basis.
While this particular covered call allows for substantial capital appreciation, what if an investor is more focused on income generation? In such a scenario, they would need to sell a call much closer to the stock price, indicated by a lower value in the Moneyness column.
Instead of opting for the September $220 call, let’s analyze the April $202.50 call (last row).
Risk vs. Reward
Selling the $202.50 call option at $3.05 would generate an income of 1.5% over 30 days, reflecting an annualized return of approximately 18.6%.
If GLD exceeds $202.50 upon expiration, the shares will be called away at $202.50, culminating in a total profit of $337 (inclusive of the share gain and the $305 option premium received).
Therefore, the resulting 1.7% return equates to a commendable 21.3% annualized return. Naturally, there exists a risk with this trade that GLD might decline, potentially erasing any gains made from the call sale.
Insight from Barchart
The Barchart Technical Opinion rating for GLD stands at an impressive 100%, positioning it within the Top 1% of all short-term signal directions.
Long-term indicators firmly bolster a continuation of the prevailing trend.
However, the market appears to be edging towards overbought territory, indicating the need for vigilance against a potential trend reversal.
Investing in gold serves as a valuable hedge against inflation and geopolitical uncertainties, though the returns may not be enticing for income-focused investors lacking dividend payments. Nevertheless, armed with these strategies, you can now generate income from your GLD investment.
Please bear in mind that options entail risks, and investors could face a full loss of their investment.
Remember, the views expressed in this article are for educational purposes and not intended as trade guidance. Always conduct your own thorough research and consult with your financial advisor before executing any investment decisions.
As of the publication date, Gavin McMaster did not hold any direct or indirect positions in the securities referenced in this article. The information provided here is solely for informational purposes. For further details, refer to the Barchart Disclosure Policy.
The opinions presented in this content are the author’s own and do not necessarily align with Nasdaq, Inc.
