Income on physical metal holdings

[DTEJD1997]

Hey all:

Question to all the "heavy hitters" with large metal holdings...

Do you ever write calls on SLV or GLD and use your physical holdings as the offset or "cover"?

I would think this could be especially useful if you have large holdings that were purchased at lower prices.

ADVANTAGES:
-could make 10%+ a year in income
-you can hedge some of the risk of holding the metals

DISADVANTAGES:
-you have to have a lot invested to make it worthwhile
-you might have liquidity issues if you are forced to sell your physical holdings to cover you option being exercised
-transaction costs would be PARAMOUNT, you've got to buy cheap, sell cheap and watch your trading costs.
-you could be prevented from participating in a large run up in price
-you have to be approved for margin (naked call writing), but you have physical to back it up!
-tax issues?

Any thoughts?

[silverflake]

Selling calls against my SLV has helped me get over the fact that it just won't turn around. I have IAU too but the premiums are bad.

[barrytrot]

This would be more appropriately done via the actual futures market. This would be "hedging" if done there and is a common practice in all forms of production. I.e. farmers sell calls on their wheat harvest, airlines buy/sell calls on the cost of airline fuel, etc.

Doing it via SLV and GLD is probably a bad idea.

The disadvantages are all mostly untrue. But it's still a bad idea!

DISADVANTAGES:
-you have to have a lot invested to make it worthwhile

This isn't a disadvantage just a "rule of the game". I believe my brokerage firm requires $100,000 in net account value to do naked calls. So assuming you have that, then it's not a disadvantage, it's just a fact that this "technique" requires a decent chunk of change

The amount to trade naked calls on the futures market is unknown to me, but someone here likely knows.

-you might have liquidity issues if you are forced to sell your physical holdings to cover you option being exercised

Assuming your physical is in widely traded types (US minted, CA minted, common third party mints) you can unload it quickly any time. APMEX and others are always buying and offer reasonable prices on large amounts.

-transaction costs would be PARAMOUNT, you've got to buy cheap, sell cheap and watch your trading costs.

Obviously if you are trading metal you want to cut the transaction costs. This has nothing to do with this "technique" although it is true with it. But if trading metal is your game then the cost of trading is a concern and figuring out how to cut a couple basis points off the trade costs is a great goal.

-you could be prevented from participating in a large run up in price

This is very true! So don't write options lower than you plan to sell. Or I should say, lower than you are willing to sell.

I've been stopped from a LOT of gains, but the truth is I would have sold anyway in 95% of the cases

-you have to be approved for margin (naked call writing), but you have physical to back it up!

I have signed up numerous people for trading accounts and as long as they had the requisite cash balance they were approved every time.

-tax issues?

No different than the tax issues seen when doing trades or option sales normally. Most likely a lot of short term gains though which are higher tax levels.

Any thoughts?

Do it via the real futures market. That was designed for this. Doing it via ETF's is probably a bad idea. I don't know why, but it seems bad to me

[DTEJD1997]

Barrytrot:

The reason why I would work the ETF's on precious metals is that the futures contracts for silver is for 5,000 ounces.

A single options K on SLV would be for 100 shares, or 100 oz.

I have had hundreds of oz. of silver at various points. I don't think I've ever had a 1,000 oz. position, let alone 5,000 oz.

So I just suggested the ETF's as it is easier to work with for us small time investors.

[barrytrot]

Barrytrot:

The reason why I would work the ETF's on precious metals is that the futures contracts for silver is for 5,000 ounces.

A single options K on SLV would be for 100 shares, or 100 oz.

I have had hundreds of oz. of silver at various points. I don't think I've ever had a 1,000 oz. position, let alone 5,000 oz.

So I just suggested the ETF's as it is easier to work with for us small time investors.

I see.