Opening Trade
8-1-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
The entire interest rate-sensitive sector has been walloped over the last three months over fears that the Fed will keep interest rates higher for longer. That is now in the price of the gold miners.
This position is a bet that our nation’s central bank will embark on a path of interest rate CUTS sometime in the next 18 months. And the shares of Barrack Gold (GOLD) only have to return to where they were in March for the position to hit max profit.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is a double in little more than a year. That is the probability that (GOLD) shares will rise over the next 26 months.
The logic behind this LEAPS is fairly simple.
After keeping interest rates too low for too long and then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.
The rate of interest rate rises has been the most rapid in history and is possibly going to trigger a modest recession by end of 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures.
And guess which asset class is one of the most sensitive to falling interest rates? That would be precious metals, especially gold. A drop in interest rates of this magnitude should allow the price of Barrick Gold to double. That’s where we were in March of 2021 when (GOLD) traded at $30.
Another factor driving down interest rates is the fact that the US government budget deficit is shrinking at the fast rate in history, down from $3 trillion to $1.5 trillion in the past year. A shrinking supply of bonds brings higher bond prices and lower interest rates.
I am therefore buying the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS at $0.46 or best.
Don’t pay more than $0.80 or you’ll be chasing on a risk/reward basis.
Barrick Gold is the world’s largest gold miner and is the end result of a long series of mergers and acquisitions. It is based in Toronto, Canada and has 16 mines in 13 countries producing 5 million ounces of gold and 400 million pounds of copper per year. Gold and copper are often found together. Its average production cost for gold is $834 compared to today’s spot price of $1,713. That gives Barrick Gold enormous upside earnings leverage when gold prices rise. To learn more about Barrick Gold, please click here.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.10-$1.00, which is typical. Enter an order for one contract at $0.20, another for $0.30, another for $0.40, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if the (Barrick Gold) does NOT rise by 31.57% in 18 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.
You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.
There is another way to cash in. Let’s say we get half of your 31.57% in the next six months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full ten bagger. It’s a nice problem to have.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 31.57% rise in (GOLD) shares will generate a 300% profit with this position, such is the wonder of LEAPS.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that the (GOLD) will not fall below $22 by the January 17, 2025 option expiration in 18 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (GOLD) $20 call at………….………$1.70
Sell short 1 January 2025 (GOLD) $22 call at….………$1.24
Net Cost:………………………….………..........……….….....$0.46
Potential Profit: $2.00 - $0.46 = $1.54
(1 X 100 X $1.54) = $154 or 298% in 18 months
If you are uncertain on how to execute an options spread, please watch my training video by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
