Not Exactly as Planned

by JDH on November 22, 2014

Interesting week.  The gold stocks were up, and by more than I expected.

As I reported threeweeks ago in My Response to the Crash in Gold, I sold all of my juniors, but I continue to hold the majors, including RGL.TO – Royal Gold Inc., FNV.TO – Franco-Nevada Corp., and SLW.TO – Silver Wheaton Corp..  I hold them for two reasons: some of them pay a dividend, and more importantly I expect them to be higher in the future, so I don’t want to be completely out of the market.

I expect continued volatility and probably weakness, so back in October I sold call options against the stocks I owned, the stocks dropped, and I was therefore able to buy back the options to close out my positions at a big profit (which mitigated the loss on the drop in the underlying stock).

So, I tried it again.

With  RGL.TO – Royal Gold Inc. trading at around $75, on November 12 I sold the November 76 calls for $1.50.  I was obviously betting that by the close of business on November 21, options expiry date, Royal Gold would be trading below $76, and the options would expire worthless.


Royal Gold, and all of the gold stocks, went on a roll, and closed on Friday at $79.07.


So the options that I sold for $1.50 were now worth over $3, and I had a choice: Either let my stocks be called away for $76, or buy back the options before the close.

I picked Door #2, and bought them back.  I waited until late in the day on Friday, but it cost me $3.05 to unwind the transaction.

So, had I simply held the stock and done nothing else, my $75 shares would have increased to $79, and I would have made a notional profit of $4.

Instead, I sold options, pocketed a $1.50 premium, but had to pay $3 to buy them back, so I lost $1.50 on the deal.  I still own the stock, but my $4 profit is now $1.50 less, or only $2.50.


However, I should point out that even though I was wrong and the stock moved in a different direction than I expected, I still made $2.50 on a $75 stock, or a 3% return.  Not bad for two weeks work.  (That doesn’t include commissions, which are small, or dividends, which are around 4% a year).

I’m okay with that.  In October the options strategy made money, and this month it reduced my potential profit, but it’s a low risk strategy, and I can sleep at night.

And so I will.  And if Royal and the other gold stocks have a decent day or two, I’ll cover again.

Thanks for reading.  See you next week.