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Getting Paid to Buy XGD

Martin Noël
October 31, 2016
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Getting Paid to Buy XGD

Underlying asset

iShares S&P/TSX Global Gold Index Fund (XGD)

The iShares S&P/TSX Global Gold Index ETF seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P Global Gold Index, net of expenses. The Index is comprised of constituents of the S&P/TSX Global Mining Index with GICS classification 15104030 – Gold.

Daily graph of XGD ($12.96, Friday, October 7, 2016)

getting-paid-xgd

Background

  • Price of XGD as the market closed on October 7, 2016 = $12.96
  • The price of XGD approaches a support range of $12.70-$12.05
  • The stochastic oscillator is in extreme oversold territory, with a reading below 10
  • The RSI indicator is in oversold territory, with a reading below 25, and has broken out above its 5-session moving average

Expectations

  • The support range of $12.70-$12.05 could be attractive to investors optimistic about the potential for gold prices to rise in the longer term.

Strategy

Instead of buying shares directly on the equities market, we could sell put options maturing on November 18, 2016. Selling put options requires that we buy XGD units at the selected exercise price. In exchange, we cash out the premium on the put options, which effectively reduces the purchase price of the units while giving us protection against a slight drop.

Position

  • Sale of 10 put option contracts on XGD 161118 P 13 at $0.70
    • $700 credit

Profit and loss profile

 

If, at expiration, the put options are in the money, the investor will buy the XGD units at a cost of $12.30, i.e. at the equilibrium threshold. This also represents a degree of protection against a drop of 5.1%.

If XGD closes at a price that is higher than the $13 strike price, the investor will not buy the XGD units and the premium received will represent the maximum return of 5.7% for the 42-day period, or 49.5% on an annual basis.

The static return, i.e. the profit generated by the position if XGD is unchanged, is 5.4% for the 42-day period, or 46.6% on an annual basis. In this case, the investor will buy the XGD units.

Intervention

No intervention is planned at this time.

Until next week, good trading!
Martin Noël
Martin Noël http://lesoptions.com/

President

Monetis Financial Corporation

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.

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