Gold and Silver ETF's
Why no options?
I was reading this the other day....
By MOHAMMED HADI
JUST BECAUSE YOU CAN'T TURN to the options market to position for moves in gold prices shouldn't prevent you from turning to the options market to position for moves in gold prices.
For some time, stock traders have been able to get a piece of the precious metal by turning to a pair of exchange-traded funds: the iShares Comex Gold Trust (ticker: IAU) and the StreetTracks Gold Trust (GLD). But because the funds own physical gold -- a commodity, not a security -- the question of listing options on them has fallen deep into the regulatory crevasse that separates the Securities and Exchange Commission and the Commodity Futures Trading Commission. Ask exchange officials why they can't list these options and you'll just get a lengthy groan in response. Ask regulators and they'll tell you that they need jurisdictional guidance from Congress...enough said.
Certainly trading gold-futures contracts is another way to get into this game, but for many that's as likely as making a visit to the emirate of Dubai -- one of the world's biggest gold-trading hubs -- and stuffing a suitcase with the yellow metal. (Granted, a stay at one of the city's many excellent five-star beach resorts makes this a more appealing possibility.)
So option traders are left with one real alternative: options on the shares of companies that mine gold.
Consider the Philadelphia Stock Exchange Gold & Silver Sector index (XAU), which includes the likes of Newmont Mining and Barrick Gold among its holdings and whose performance has served as a decent directional proxy for gold prices this year.
When gold peaked at just under $720 an ounce in May -- a gain of about 39% from the start of the year -- the index, too, reached its highest levels of the year with a rise of roughly 30%. In the downdraft that followed, gold lost about 22% in a month and the index dropped approximately 26%.
And for option traders there's an even more interesting aspect. "Unlike most stocks, gold gets more volatile as its price rises," notes Mike Belin, the U.S. head of Equity Derivatives Strategy at Deutsche Bank. That volatility spills into the gold-mining stocks. In turn, with gold prices rising, options on XAU should also get more expensive.
As a result, traders expecting a rise in gold prices next year can profit by buying options on gold stocks, Belin says. Deutsche Bank's analysts are "very bullish" on gold prices, by the way.
In particular, Belin suggests that gold bulls look at call options on the index. June 2007 calls on the index are "as cheap as they've been in recent memory," Belin says, and in the event of a gold rally should benefit both from the corresponding rise in mining stocks and the uptick in volatility.
Regulators did take one step this week that should make life easier for options traders. They finally approved a request by the Chicago Board Options Exchange and the New York Stock Exchange to allow brokers to include risk-reducing options positions when assessing margin requirements. (The issue of whether futures positions can be included in the assessment is another issue that for now is wandering around in the above-mentioned crevasse.)
The change, which will be effective in April, could substantially reduce the amount of collateral traders are required to put up when placing a trade. For example, according to an illustration on the CBOE's Website, the initial margin requirement for a position that includes 500 shares of IBM stock and five put options that serve as a hedge falls to just under $1,900 from about $24,000 under current rules.
It's an important shift because "what usually hampers customers from being successful when they trade stocks, options and futures in a single account is that they have very large capital requirements," says Tom Sosnoff, chief executive of online brokerage thinkorswim Group.
"This is going to level the playing field between individual traders and professionals because now individual traders can do things that they couldn't do before," Sosnoff says. "They can be more effective in adjusting and hedging their positions using equities."
MOHAMMED HADI covers the options market for Dow Jones Newswires in Jersey City, N.J.
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