Covered Calls and Gold – A Perfect Match
This is a fairly consistent rule in listed options markets: As assets rise in value, option pricing tends to pull back on a relative basis. As markets push higher, investors are deemed to be less fearful and therefore the cost to insure a portfolio against a market drops.
We see this rule routinely play out in the VIXC (the S&P/TSX60 VIX Index). Markets have been particularly ‘un-fearful’ this year and that has translated into an average VIXC level that is a little lower than it has been in recent years. Equities have been very orderly in their behavior and fear gauges have plummeted as a result.
However, this is certainly not always the case with gold and gold mining equities. Gold tends to rise as a result of factors that could be considered concerning, such as geopolitical risks, U.S. politics, dollar value fluctuations, concerns over inflation and fiat currencies. Lately, gold has been rallying for a variety of these reasons. And relative option pricing, or implied volatility, has been rising along with it. This plays particularly well into covered call strategies that wish to sell calls into a rise in the underlying assets.
Horizons Enhanced Income Gold Producers ETF (HEP) is one such fund that sells calls against a portfolio of about a dozen gold producing companies. As option pricing improves, the fund is able to generate better call income via call sales and also a slightly better hedge into a rise in the underlying equities. This is a potentially ideal scenario for those who like to lock in some gains and seek to create incremental income via covered calls.
Chart: courtesy of www.livevol.com, September 7, 2017
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
Vice President, Portfolio Manager, and Options Strategist
Horizons ETFs Management (Canada) Inc
Hans Albrecht is vice president, portfolio manager, and options strategist at Horizons ETFs Management (Canada) Inc. He co-manages one of the largest option books in Canada, $800 million in covered call ETFs and oversees day-to-day options activities. Mr. Albrecht also was an options floor market maker and traded a large volatility book for National Bank Financial for many years. He has lectured at McGill and has appeared on numerous expert derivative panels. He has been quoted in Bloomberg, Investment Advisor, Globe and Mail, and is a regular on BNN. ETF Lipper Award winner.
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