The Striking Price

How to Profit From a Weaker Dollar

STEVEN M. SEARS

Saturday, May 16, 2015

Bullish options on gold and silver offer ways to profit from a weaker greenback.

Anti-dollar trades are a nascent theme in an otherwise listless options market.

Investors are establishing bullish gold and silver positions to profit from further weakness in the U.S. dollar. Gold and silver are dollar denominated so the currency’s weakness makes the metals cheaper to foreign buyers, thus pushing up prices. Precious metal positions also benefit from inflation, which remains as elusive as it is closely monitored.

In recent trading, an investor bought 30,000 SPDR Gold Shares ETF (ticker: GLD) June $120 calls, paying up to 86 cents, when the exchange-traded fund was trading around $116. The large trade was quickly followed by the purchase of 23,000 June $119 calls at $1.17, and the sale of 13,500 June $116 calls.

The June $119 and $116 call action indicates an investor was “rolling up” the June $116 call. This means they closed the call position, opening a new position with a higher strike price. The June $119 call position should be monitored.

The call trade signals to the market that an investor has an accurate read on the gold market. How? Because the investor opted to “roll up” the positions. If he thought the gold rally’s momentum was temporary on concerns the dollar would sharply strengthen, the June $116 call position would have been closed, and profits realized. Instead, profits were rolled into a larger position with a higher strike price. That is what confidence looks like in the trading markets.

In the iShares Silver Trust (SLV), investors recently bought 10,000 October $18 calls for 59 cents and 10,000 October $18 calls for up to 38 cents. Silver is considered the poor man’s gold; it costs far less.

Investors interested in trading gold or silver can piggyback the current positions and copy the moves of smart investors.

Another possibility is constructing new positions with longer expirations. To limit the risk, use “call spreads” that involve buying one call and selling another with a higher strike price but similar expiration.

With GLD at $117.26, investors can buy the March $120 call, and sell the March $135 call for $4.09. The maximum profit is $10.91, representing a 267% return should GLD be at $135 at March expiration. The trade break-even is $124.09, which represents the $120 strike price plus the cost of the position.

With SLV at $16.66, investors can buy the January $17 call and sell the January $21 call. The position costs 97 cents. The maximum profit is $3.03. The trade break-even is $17.97, representing a return of 312% if SLV is at $21 at expiration.

Some investors dislike call spreads because the strategy limits potential profits, since the upside is capped by the call option that was sold. If someone has a strong conviction about a security, these investors argue that the prudent strategy is the simplest: Buy a call.

Yet, spread strategies remain popular with many sophisticated investors. Even though the profits are limited, investment returns can be substantial, as evidenced by the GLD and SLV trade profiles. Of course, both trades will be losers should the associated securities decline in price.

ELSEWHERE, INVESTORS are aggressively nibbling in the mistrusted, poorly performing financial sector. Call it the sun shines on dog trade. With the Select Sector SPDR-Financial (XLF) around $24, investors recently bought more than 70,000 September $26 calls for 23 cents, increasing existing open interest of about 90,000 contracts. The action expresses a view that the XLF may rally into September, a month when the Federal Reserve might raise rates. Overall, sentiment is about evenly split between bearish puts and bullish calls. XLF’s most widely held positions are the June $25 call with about 228,000 outstanding contracts, and the June $22 put with about 196,000 outstanding contracts.

Reprinted by permission of Barron's Online, © 2015 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.

Talk to Options Professionals

Questions about anything options-related?
Call or chat with an options
professional now.

Call 1-888-OPTIONS
Speak to an Options Professional!
Chat with Options Professionals

Questions about anything options-related?
Chat with an options professional now.

Start Live Chat
Email Options Professionals

Questions about anything options-related?
Email an options professional now.

options@theocc.com

REGISTER FOR THE OPTIONS
EDUCATION PROGRAM

  • Free, unbiased options education
  • Learn in-person and online
  • Advance at your own pace