Gold option income as a margin-sizing problem

From a brief spike to a continued gold rise

A US policy-rate increase in December 2015 produced only a brief gold-price spike in the listed gold ETF, followed by a quick reversal.

From the start of 2016 through mid-February, listed equity prices fell while gold prices rose, including a move in gold spot and futures through the 1,200 level. After equities reversed higher, gold continued to rise, with the front-month futures contract reaching about 1,288 and the listed gold ETF closing at 121.5 on March 10, 2016, the same day a further European rate cut and larger asset-purchase program were announced.

One sell-premium procedure

A short naked call on the listed gold ETF can be sized as a premium-collection procedure with explicit strike, expiration, and assignment consequences if the underlying finishes above the strike.

Editorial note: that package is the Option income strategy in this workflow. Entry, exit, and abstention are written as one procedure over the system holding period, using the rule inputs, the gold market state, and the execution constraint that assignment is a defined outcome, not a surprise.

Assignment and margin rise with size

Illustrated short-call assignment at an underlying close of 128 versus a 123 strike produced a 5-point loss per share, equal to 5,000 on 10 contracts and 50,000 on 100 contracts.

The same short-call example reserved margin of 19,532 for 10 contracts and 195,320 for 100 contracts, so larger size scaled both required capital and assignment loss.

Editorial note: Margin management is the filter that asks, before entry and again through the position, whether account equity can absorb that reserved capital and that assignment loss. The loss decision is bounded before the trade is placed.

The other expiration path and a short-put ladder

If the listed gold ETF instead closed at 122 on expiration Friday, the illustrated 123-strike calls expired worthless and the collected premium of 2,000 on 100 contracts equaled a 1.02 percent holding-period return on 195,320 of margin over seven trading days.

A complementary short-put example used a floor 2.23 percent below 118.61, sold the 115 strike for 16 of premium per contract, and posted margin of 2,027, 20,272, and 202,720 for 1, 10, and 100 puts.

Editorial note: the put ladder repeats the same Risk and sizing test. Collected premium is an outcome of the procedure. The sizing decision is whether each posted-margin step stays inside what the account can absorb if the view is wrong.