In times of economic uncertainty and market volatility, investors often turn to safe haven assets like gold to preserve wealth and generate income.
Gold seems to be back in favor with investors as the Spdr Gold Shares ETF (GLD) is up 12.73% in the last six months.
GLD aims to match the performance of the price of gold bullion. Unfortunately for income investors, the GLD ETF does not pay a dividend.
Thankfully, as sophisticated investors, we can generate an income from holding GLD by using options. The strategy is a known as a covered call which involves selling call options against a stock position.
Let’s take a look at the Barchart Covered Call Screener for GLD:
GLD Covered Call Example
Let’s evaluate the first GLD covered call example. Buying 100 shares of GLD would cost $20,218. The September 20, $220 strike call option was trading yesterday for around $3.35, generating $335 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.7% in 184 days, equalling around 3.34% annualized. That assumes the ETF stays exactly where it is. What if the ETF rises above the strike price of $220?
If GLD closes above $220 on the expiration date, the shares will be called away at $220, leaving the trader with a total profit of $2,117 (gain on the shares plus the $335 option premium received).
That equates to a 10.6% return, which is 21.2% on an annualized basis.
That particular covered call allows for a lot of capital appreciation. What if an investor was more income focused? They would need to sell a call much closer to the stock price (look for a low value in the Moneyness column).
Instead of the September $220 call, let’s look at the April $202.50 call (last row).
Selling the $202.50 call option for $3.05 generates an income of 1.5% in 30 days, equalling around 18.6% annualized.
If GLD closes above $202.50 on the expiration date, the shares will be called away at $202.50, leaving the trader with a total profit of $337 (gain on the shares plus the $305 option premium received).
That equates to a 1.7% return, which is 21.3% on an annualized basis.
Of course, the risk with the trade is that the GLD might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating on GLD is a 100% and ranks in the Top 1% of all short term signal directions.
Long term indicators fully support a continuation of the trend.
The market is approaching overbought territory. Be watchful of a trend reversal.
Gold investing can provide a hedge against inflation and geopolitical risks, but the returns can be unattractive for income investors without a dividend payment. Thankfully, you now know how to generate an income from your GLD position now.
Please 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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
