If you’ve been waiting for the right time to buy gold stocks, it has been a tough year…
Many have rocketed 100% higher without even a 10% pullback. There hasn’t been a clear, low-risk entry point.
In the DailyWealth Trader (DWT) portfolio, we hold two gold stocks that are both up more than 80%. And for a while, I was waiting for that “right time” to recommend more.
[ad#Google Adsense 336×280-IA]I’d bet lots of Growth Stock Wire readers are in the same boat. Maybe you hold some gold stocks… but you’ve been waiting to add to your positions.
Last week, we got a minor pullback in the sector. It could be the start of a bigger correction… and this might present us with a lower-risk buying opportunity.
But I don’t suggest you wait around to find out. Instead, I suggest you start adding to your positions now. One of my favorite, low-risk ways to do that today is by selling puts…
When you sell a put, you get paid right now for agreeing to buy a stock or fund you choose at a lower price. So if there is a larger pullback over the next couple of weeks, you’ll get to buy gold stocks at a big discount to today’s price. If not, you’ll keep the cash payout.
Before we get to the details of the trade, let’s take a quick look at a major development in gold…
Two weeks ago, I noted the inverse relationship between the U.S. dollar and gold…
When the dollar falls, the number of dollars it takes to buy an ounce of gold rises. Gold may not change in euros or yen. But folks in the U.S. will see the price of gold rise.
I explained that if the U.S. Dollar Index fell below a reading of 94 – a level at which it had bounced higher a few times before – the big rally in gold and gold stocks would likely continue.
On April 29, the U.S. Dollar Index broke down to a one-year low of 93… and gold jumped to a one-year high of $1,295 an ounce. Then last week, the dollar bounced higher. And as expected, gold and gold stocks fell.
That counter-trend move lost steam Friday.
Your chances at calling the next short-term move correctly aren’t much better than a coin flip. If you want to take the cautious approach to profiting on gold stocks – at least with a portion of your portfolio – I suggest selling puts on the VanEck Vectors Gold Miners Fund (GDX). The $7 billion fund holds a basket of 39 gold stocks. It’s a great way to gain diversified exposure to the sector.
As you can see in the chart below, GDX is up about 100% from its January low…
Right now, I suggest selling the May $24 puts on GDX for about $0.50. That’s a 2.1% payout on your purchase obligation.
If GDX is trading below $24 on May 20 (option-expiration day), put sellers will end up buying shares at more than a 7% discount to Friday’s price. At that point, you can hold on to the fund with a 25% trailing stop.
If GDX stays above $24, put sellers will get to keep the $0.50 free and clear. In 12 days, that comes to 63% annualized. It’s a great “consolation prize” if we don’t get to buy GDX at a big discount.
If you’ve been waiting around for gold stocks, don’t wait any longer. This is a great, low-risk way to profit.
Earn income or buy at a discount… It’s a win-win gold-stock trade.
Good trading,
Ben Morris
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Source: Growth Stock Wire