Gold Covered Call Strategy: Sometimes it Works, Sometimes Not So Much

by JDH on January 18, 2014

Well, I sort of won this week.  Allow me to explain.

For the last few months I have operated under the assumption that the price of gold, long term, is going much higher.  In fact, I am on record as predicting that by year end gold will be $1,600 per ounce, but I expect to drop to $1,000 by the end of March before rising rapidly over the balance of the year.  Armed with that perspective, I want to hold my gold shares, because it’s impossible to pick the exact bottom.

So, in order to retain my gold shares but to earn an increased rate of return, I sold calls against some of the blue chip gold stocks I own.

For example, on January 2, 2014 I sold the RGL.TO – Royal Gold Inc. January 52 calls for $1.50 each.  At the time of the sale Royal Gold was trading around $51.50, so I thought it was a good deal.  As long as Royal didn’t increase over $52 by the time the options expired at the end of trading on January 17, I would keep $1.50.  Even if Royal increased all the way to $53.50 I would still break even on the deal.

As luck would have it, by the end of the morning on January 17 Royal Gold was trading at around $60 per share.  That’s right, a quality gold stock that had fallen from $80 at the start of 2013 to $46 just before Christmas 2013 was staging a remarkable bounce back, increasing by over 16% in 11 trading days.


Of course, had I known that a stock that lost almost half it’s value in 2013 was going to go up by more than 1% a day to start 2014 I would have bought call options, not sold them.  I would have made a ton of money.

Alas, the opposite happened, so on Friday morning I took my medicine like a man and bought back the calls I had sold.

I sold them for $1.50.

I bought them back for $8.05.

Ouch.  Excluding commissions, I lost $6.55 on the deal.

Perhaps “lost” is the wrong word.  I still own the stock, and the stock has increased from $51.50 to $60, so my stock has increased by $8.50, so I’m very happy about that.  Also, on January 17, Royal Gold paid me a dividend of 19 cents per share, so I’m ahead by almost $8.70 in the period on my stock holdings.  That’s good.

The Lesson Learned

In a rapidly rising market, selling calls is not a good idea.  Just hold the stock, or be aggressive and buy calls, but don’t sell them.  If I had done nothing I would be ahead by $8.70.  By selling calls my $8.70 profit in the stock is reduced by the $6.55 loss on the calls, for a net profit before commissions of $2.15.

A $2.15 profit on a $51.50 stock in 11 trading days works out to a 100% profit on an annualized basis, which is great, but not as high as the “un-hedged” 400% I would have earned by doing nothing.

So have I learned my lesson?  Will I stop doing covered call writing?


In fact, on Friday afternoon, I did it again.  This time I placed an order to sell the Royal Gold February 62 calls for $1.55, and I was filled at that price.

So, if Royal Gold increases by less than 3% between now and the third Friday in February I keep $1.55, and all is good.  If it increases by more than that, I’ll look silly, again.

Royal Gold

However, Royal, and many of the gold stocks, have increased very quickly, and in a normal market some form of pullback would be expected.

As you can see from the chart, the Relative Strength Index closed Friday at over 76, which is in very over-bought territory.  The green boxes show the stock well over it’s 200 Day Moving Average, and that’s usually an indication that a pull back will happen, and in fact it may have already started.  I re-covered on Friday afternoon around 2:30 pm with RGL trading just over $60, and by the end of the day it was down to $58.70, so the pull back perhaps as started.

I will therefore wait, and watch, and if the pullback happens, I’ll cover my calls and be thankful that I mitigated my losses.

I don’t always win, but with this strategy, even when I “lose”, I’m still satisfied.

As an aside, I picked the worst example.  I also did covered writes this month on AEM.TO – Agnico-Eagle Mines Ltd., G.TO – Goldcorp Inc., FNV.TO – Franco-Nevada Corp., and SLW.TO – Silver Wheaton Corp., and my results were much better on those stocks, since they did not move as high on the week.  In fact, on the Goldcorp covered write I actually made money, since I was able to unwind my position at around the $25 call strike price.  Sometimes the strategy works quite well.

That’s my report for this week.  Thanks for reading, and see you next week.