Put Your Money Where Gold Might Be

By Brad Zigler

One of the risks of keeping charts is reading too much into them. I've had a whole weekend to stare at the chart that gives us the daily subhead you see above. Our monetary inflation indicator, after sinking for months, seems to be building a base. Twice, the 7.5% level was tested and held in November. Look at the chart yourself.

Real-time Monetary Inflation Indicator

See the base? We haven't seen that before. At least, not this year.

Now look at gold. That pennant flag formation (lower highs and higher lows) often precedes breakout moves.

So, it looks like the odds of a sharp price move in gold are increasing. The halt in the disinflationary tumble makes a bullish prospect almost palpable.

Let's be realistic, though. The gold market has stumped a lot of metals aficionados this year. It's best we not get ahead of ourselves. In fact, why don't we embrace the possibility that this could be a head fake? We can still make money off it while we aim to buy gold.

How so?

Welcome to the world of put writing.

Puts, you may know, are options that grant their owners the right, but not the obligation, to sell an asset at a contracted price. If you own a January put on say, the SPDR Gold Trust (NYSE Arca: GLD), you can sell the trust shares at the strike price - let's say that's $70 - any time before the contract's January 16 expiration date. If you're the seller of the put, on the other hand, you've got the obligation to be there when the option buyer wants to exercise her/his right. You've got to be willing and able to buy GLD at $70. For undertaking that contingent obligation, the put buyer forks over some cash - a premium - to you. Friday, when GLD closed at $74.52, the $70 put was worth $2.40 a share, or $240 for a 100-share contract.

GLD tested $70 in November. Selling a $70 put is the equivalent of having a resting buy limit order at the market's previous low. If GLD breaks below $70, you'll be tapped to buy GLD shares at the strike price, so have $7,000 at the ready.

If GLD stays above $70, though, you get to pocket the premium as profit.

Now, what's not to like about a limit order that pays you

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