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Tuesday, September 14, 2010

Analysis of gold Sep 30 2010 covered call

Gold shot up today (9/14/2010), so I had to do a quick analysis:

1) close out my call position and sell gold for a profit?

or

2) leave things alone until expiration and wait for a possible assignment?

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ANALYSIS #1:

Opening trades:

bought gold @ $122.75
at this moment, gold is at $124.48
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profit of $1.73 x 100 = $173.00
minus $10 fee to sell gold
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NET profit on sale of gold if done now = $163.00

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sold call @ $1.67
right now, call costs $2.46 to buy back
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cost = $0.79 x 100 = $79.00
initial sell to open fee = $10.75
buy to close fee = $10.75
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total costs = $79 + $10.75 + $10.75 = $100.50

CONCLUSION (if close out position now) :

$163 - $100.50 = $62.50

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ANALYSIS #2:

(leave everything alone until expiration and wait for possible assignment)

Strike = $123
bought @ $122.75
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Profit = $0.25 x 100 = $25.00

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sell to open call @ $1.67 x 100 = $167.00
minus sell to open fee = $10.75
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= $156.25
minus assignment fee of $20
----------------------------
$136.25

CONCLUSION:

Net profit if assigned: $25 (sale of gold) + $136.25 (call option) = $161.25

Net profit if NOT assigned: $167 (for selling call) - $10.75 (fee for opening trade) = $156.25

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ANALYSIS ON 9/17/2010

When I logged on this morning at 10:00 am, GLD was trading at $124.74.

The Sept 30 2010 123 call option was trading at $2.48 (bid) and $2.53 (ask).

TRANSLATION: as the price of GLD rises past the strike price of $123, the value of the call option becomes more valuable.