Covered Calls on Gold Stocks?

It’s been some time since I talked about gold. Not surprising since I am anything but a gold bug.

But when you look at where some of the premier Canadian gold stocks are trading, even the most avid non-believer has to take a second look. Not that I recommend buying the miners in search of a turnaround, but as covered call writing candidates some of the stocks look interesting, particularly if you are willing to write longer term at-the-money calls.

Take Goldcorp (Symbol: G, Fridays close: $24.31), Agnico Eagle (AEM, $27.56) and Franco Nevada (FNV, $42.15) as examples. Goldcorp and Agnico Eagle are near 52 week lows and there seems to be some decent support at these levels. Franco Nevada has recovered from a low $33.05 and seems to be in a trading range between $35 and $50.

Covered calls on these stocks should be viewed as a way to generate cash flow in your portfolio. Options on gold stocks typically trade in the top quartile of all Canadian implied volatilities, reflecting their propensity to have above average intraday swings without really going anywhere over the longer term.

With that in mind, take a look at buying Goldcorp at $24.31 and writing the July 25 calls for a $2.60 per share premium. The stock pays a monthly dividend of 5 cents per share, which would generate the following returns over the next eight months; 15.18% if the stock is called away, 12.34% if Goldcorp stays the same. The premium plus the dividends lowers your breakeven on this trade to $21.3,1 which is below recent support.

Franco Nevada generates similar numbers if you bought the shares at $42.15 and wrote the July 44 calls at $4.15. When you include the 6 cent per share monthly dividend, the eight month return if called away is 15.37%, return is the stock stays the same is 10.98%. The downside breakeven on this trade is $37.52.

Finally, with Agnico Eagle you could look at writing the June 28 calls. AEM pays a quarterly dividend of 22 cents per share and you should get two dividends prior to expiry. Using these numbers the seven month return if called away is 14.80%, the return if the stock stays the same is 13.21% with a downside breakeven of $23.92.