Today, gold dropped, quiet a bit. The GLD ETF was down over 8% when I wrote this.
This is an image of the current quote and a peek at two options that expire Jan, 2015. I then looked to see how this would look if executed as a spread trade, i.e. to buy the lower priced call, and sell the higher, same number of contracts for each one.
The prices had already changed slightly, but the chart is a great way to look at this. The $170 call is bought for $4.75, and the $180 call sold for $3.15. Net cost, $1.60. Since a contract is for 100 shares of GLD, 10 contract spreads will cost $1600 plus commission.
If GLD closes at or above $180 by January, 2015, this trade will return $10,000. Put another way, the market is offering you a 6 to 1 bet against gold returning to its all time high in the next year and a half. I know the market has no personality, no emotion, but it seems to be answering the question, “will gold hit its old highs?” with a strong answer, “not bloody likely.”
by Joe on January 31, 2013
Apple reached its all time high of just over $700 this past September, but has recently dipped below $440. They say that the price of a stock has no memory, it is what it is based on today, it recent earning, and its projected earnings. That said, there are opportunities to place a bet that can get you many times your initial money if the stock recovers even just part way.
Disclaimer – The post title is Betting on Apple. With Odds of 9-2 (or 4.5 to 1). These are gambling terms and this article is not about investing, it’s about gambling. Buying a stock and selling covered calls is a bit less risky than just owning the stock, as you’ve shifted your risk down the curve a bit. Just buying options is a time constrained wager. The bet I will share is that I believe Apple will recover to $600 by January of 2015. The payoff for $2200 is $10000 if this happens. Let’s look at the details:
This chart was produced last Friday, Jan 25th. The stock was trading at $445.91. To enter this trade, I looked at the price to buy the Jan $500 calls, and they were Ask – 46.50, which meant that at $600, I’d get back $100 for a bit over a 2 to 1 return. But, it would take $700 before I saw 4 to 1. So I looked at the price to sell the $600 call, and it was Bid – $24.00. The profit/loss chart appears above. You can see that at $500, the bet is lost, but each dollar above $500 is $100 returned. So, it’s $522 to break even and at $600, the $2200 returns $10,000.
Above, you can see the trade as it was executed. I entered it as a spread order, which meant that both trades had to go through and only if the difference was the $22 I bid. $600 is a 35% rise over the next two years, $522 is just 17%. This is leverage at its best. Stock up 35%, my wager up 354%. Trades like this don’t work every time, but if you have a lucky streak, and only one in three do, you’re still making money. Personally, I view the chance of this hitting at about 50/50. On a final note, this is not my investment money. It’s money set aside to go to the casino. But since I don’t actually go to the casino, this is where I’ll wager.