
Top dividend-paying precious-metal stocks – these dividends could triple!
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***Looking for protection against inflation or recession while getting paid to wait? Here are a few options to seriously consider.***

![](oo2ziztfbtq-carl-cerstrand-1-1024x683.jpg)

The case for buying precious-metals and miners was recently made [**here**](https://optionworkshop.net/blog/trump-won-and-you-missed-the-rally-now-what-part-2-goldsilver-precious-metals/), and now it is time to share our favorite trades.

Gold has been like a kite caught in an unrelenting storm for the past 10 years; flying to extremes ($1900)
on wind streams of economic collapse, monetary expansion and Brexit then dovetailing lower on Wall Street’s sporadic hopes of normalization.
For the better part of the last 4 years, Gold has been consolidating and trending lower
but with Donald Trump about to usurp the throne, the glory days may soon return with a vengeance.

:::cut:::

The prices of precious-metals have been unstable to say the least,
so it was unexpected when we dug into the dividend paying history of gold miners.
Not only have dividends remained stable throughout this volatile decade, a couple have ***grown*** dividends.
Not all miners are created equal and few investors understand the differences.

**Franco-Nevada Corporation** (FNV) and **Royal Gold** (RGLD) both have one of the highest dividend yields in this industry,
1.5% and it has been stable throughout.
RGLD has increased dividends almost every year for 15 years straight,
with an annual compounded growth rate of roughly 20% – right through the precious-metals downturn.
If gold has a sustained rise in price as we expect, dividends could triple in these names.

The main reason why FNV and RGLD can pay out such a decent dividend is due to their business model.
Both are royalty streaming companies – they invest cash into other miners
which gives them the right to gold and silver at locked-in low prices in the future.
This allows for a high degree of predictability in cashflows which in turn allows for higher dividend payouts.

***A 5-10% allocation to these FNV and RGLD are attractive at current prices.***

For those who want more upside if prices of precious metals are to appreciate significantly,
we quite like **SSRI**, **AEM** and **NG**. There are no dividends here but these are rare gems as they capture the most upside during rallies in gold.
Because of operating leverage, miners generally capture 2x of the upside in gold and these names capture even more upside compared to peers.

Other alternatives include ETFs which provide exposure to the entire sector thereby reducing individual company risk.
The precious-metals sector is split into roughly into two: the established miners who have proven reserves and stable cashflows (senior miners) and the exploration miners who have much higher risk (junior miners). **GDX** tracks the seniors and **GDXJ** tracks the junior miners.

Since individual company risk is less of a concern, buy and hold investors who want to aggressively hedge inflation risks
or participate in the coming gold rally should allocate greater than 10% of their portfolio to GDX/GDXJ.
Again, the current pricing is attractive in our opinion.

**How can I participate with options?**

Let’s say you’ve established that 1,000 shares of GDX is the optimal position you should have you’re not sure that the timing is optimal.
You can consider selling a put around the 18 strike for expiration in March and buy 500 shares of GDX outright.  
 We believe $18 is a major resistance area for GDX since even the strong optimism for rising interest rates
 and dollar did not push GDX below $18 recently.

As of Dec 30, 2016, you could have sold the $18 strike March 17 expiration for 0.57c,
meaning if GDX closes above $18.00 on March 17, you pocket .57c per share.
Selling 5 contracts (500 shares) would net you about $285 minus commissions.
Splitting the 1000 shares by selling some 5 puts and buying 500 contracts allows the investors to gain
even if the stock doesn’t move. ***And if the stock falls, the investor is still better off by $285.***

![](payoffchart.png){.thumb}

Buying the stock only gives a more aggressive payoff structure and would be the best bet
for those who are outright bullish on the timing and direction.
For those who think gold may take a bit of time to get going would be better off with buying the stock and selling some puts.

There are of course other ways to structure a bullish bet on gold – these include:
**bull put or call spreads**, **buying calendar spreads** and outright **call buying**.
Many strategies allow for very structured profit and loss charts where the investor knows exactly what their maximum risks/rewards are.

Until next time, Happy Trading!


# One Easy fix for traders getting stopped out too early or cutting profits too soon

If you’ve traded actively for at least a few months or years, you’ll know all too often the agony that comes
with getting stopped out of a position and immediately, the trade takes off.
A similar but lesser form of agony is felt when a trade has hit your price target and you proudly sell your position.
Except, it keeps going and going...

:::cut:::

I know I’ve felt these emotions more times than I can count.
If only there was some magic indicator which would give me the expected range of the overall market,
I could better set my stop loss and profit taking levels.

Fortunately, I eventually figured out that the VIX index is a simple and solid indicator for this.
[What is the VIX index?](http://www.investopedia.com/terms/v/vix.asp)

I instinctively check VIX throughout the day to make sure it is within "normal ranges" when putting on and taking off trades.
Just take a look at the below chart:

![](chart-1024x588.jpg)
Figure: Data: January 2, 2004 – December 16, 2016

Whenever the VIX is under 17, the S&P500 daily range averages less than 1% (High of day minus Low of day).
And most of the time the VIX is under 14, the S&P500 range averages less than 0.7%.
However, when the index is trading close to 17 or higher, more extreme moves in the S&P500 can be expected with much greater predictability.

Here is a breakdown of the graph in table format:

| VIX Values     | S&P 500 H-L Averages | # of Occurrences | %age of Occurrences |
| -------------- | -------------------- | ---------------- | ------------------- |
| under 11.01    | 0.61%                | 92               | 2.8%                |
| 11.01-14.00    | 0.74%                | 919              | 28.2%               |
| 14.01-17.00    | 0.96%                | 793              | 24.3%               |
| 17.01-23.00    | 1.22%                | 768              | 23.5%               |
| 23.01-30.00    | 1.78%                | 397              | 12.2%               |
| 30.01 and over | 3.35%                | 295              | 9.0%                |

Even traders who do not trade options must pay close attention to the VIX index to avoid exiting positions too early and getting whipsawed.
Equally important, when volatility is low, don’t expect big moves especially in names highly correlated
to the S&P500 index in terms of direction and beta.
In low volatility environments, you must take profits earlier and keep a tighter stop loss.

Here, we’ve provided an easy way to roughly gauge the market ranges for the day, but we could of course dig much deeper.
For instance, we could combine volume, sector and many other factors
in our analysis and come up with more accurate measures of range not just for the overall market,
but also for certain sectors and stocks.

Perhaps, in the future, this analysis will come, but for now, pay attention to the VIX.

Until next time….Always stick with your risk limits and Happy Trading!



# Day trading options

The term “day trading” assumes that a trader opens and closes positions within a single trading session and doesn’t take positions overnight.

Also, when talking about day trading, people generally think of instruments such as – equities, ETFs and futures. Not options.

However, let’s analyze whether we can use options for day trading and, if so, we should consider how to adjust trading styles
and which nuances to focus on while trading options within such a short time frame.

:::cut:::

## Day trading requirements

First, let’s consider which conditions an instrument must satisfy to be traded within a day without taking positions overnight.
The most important are:

- Relatively high volatility
- Enough liquidity
- Acceptable commissions

Volatility is required to allow a trader to catch a relatively large price move.
Certainly, we could say that volatility may be “scaled” if an instrument can be traded with leverage,
but in this article, we consider non-leveraged trading.

Liquidity is required to allow a trader close his position at any moment with a tight bid/ask spread.
When analyzing liquidity level, we must take into account the size which we trade.
If we trade only one contract, then liquidity is not an issue in most of the instruments you might want to trade.
Besides the quantity of contracts which you can buy/sell in any given moment, an important metric is the size
of the spread between best market orders. You pay half of the spread to the market each time when buying/selling at market price.

Commissions is not only an instrument property as it mostly depends on your broker/FCM.
The only requirement is that commissions must not kill a significant part of your profit.

Now let’s take a look at whether options satisfy these requirements.

## Options price volatilities

The heading above is a bit misleading for anyone who knows something about the implied volatility concept.
This paragraph is not about IV/HV of an option’s underlying instrument; it is about the volatility of the option’s price itself. Here we are considering options not as a derivative, but as an independent security.

To start, let’s take three options on the S&P 500 futures index, which are being traded at the moment of writing this article.
We consider three options, one is at-the-money, and two (call and put) are out of the money.
For each of the options, we build a candlestick chart for daily prices from the beginning of the instrument’s lifecycle to the current day.
We can see on the chart that price movements are significant, sometimes moving more than 100% in one day.

![](cnds_4months-1024x576.png)
Figure: ES mini 2200 put and call daily prices, 4 months

Now let’s build the chart for intraday data, 10 minute periods:

![](cnds_1day-1024x576.png)
Figure: ES mini 2200 put and call prices within one day

The day was selected randomly, 2016-11-22.
It’s easy to see that the price range of the put option for this day was between 22 and 27.5 points or more than 20%.

In other words, the option’s price changed significantly more than the underlying’s.
Therefore, options price volatility is more than enough to allow traders to use them as a speculative security for day trading.

### Note

The charts above were built for option strikes which now are at the money.
If an option is far in or out of the money, then it’s price will not be so volatile.

## Options liquidity

Liquidity of a single option is always lower than the liquidity of its underlying. There are several reasons for this.

1. The number of options is bigger than the number of underlyings by thousands of times.
   For example, right now (when this article was written) there are 6 options series for the ES mini December futures.
   Each series contains about 400 options.
   Even if we assume that the number of people who trade options is equal to the number of people trading futures (the underlying),
   their interest is dispersed on all the different options.
2. In reality, the number of people who trade options is much fewer than number of traders for linear instruments

### Near the money liquidity concentration

The further the strike is from the money, the less liquidity exists at that strike.
If we open a big position in an ATM option, we must remember that it might become harder to close that position
if the underlying price changes significantly causing the option to be far in or out of the money.

To demonstrate this let’s visualize some data from the CME Group website.
This is a time and sales report, a simple table containing the following columns:

- Trade time
- Trade instrument (call/put and strike)
- Trade price
- Number of contracts in trade

We want to understand at which strikes the most trades are concentrated.
The best way to visualize such kind of information is a histogram.
We’ve built two: the first shows a distribution of the number of trades,
while the second illustrates a distribution of the number of traded contracts.

![](strikes_hist-1024x576.png)
Figure: Number of trades per strike in one day

As expected, most trades occurred near the ATM strike. The black dashed line on both charts denotes current underlying price.

But since we are talking about intraday trading, it’s not likely that the liquidity of a particular contract will change significantly in one day.

### Spreads

What really can affect the performance of intraday options trading is the bid/ask spread.
Let’s compare the spread of the underlying (ESZ16 futures) with that of the corresponding ATM call option.

Right now the spread in ESZ16 futures orders book is 0.25 or 12.5 $ and this is equal to the minimum price step,
denoted in contract specification.
Contract nominal value at current price is 2200/0.25\*12.5 = $110,000. The spread in futures then is equal to 12.5/110000 = 0.011%.

[http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_contract_specifications.html](http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_contract_specifications.html)

On the other hand, the current price of an ATM call for this futures contract with expiration in two weeks is about 16 points.
Price step of this contract is also 0.25 = 12.5$.
Spread can’t be less than the price step.
Thus minimum bid/ask spread is 0.25/16 = 1.56%, which is huge in comparison to the spread for its underlying futures contract.

## Commission

Commissions are mostly a property of the brokerage firm, not the contract.
In our understanding, commissions must be at least smaller than half of the contract’s price step.

## Day trading options, conclusion

Near the money options can be used as a speculative instrument for intraday trading.
When selecting the appropriate contract, it’s worth it to pay attention to the following things:

- average size of the bid/ask spread
- how far an option’s strike is from underlying’s price; always try to select ATM option for best liquidity
- how many contracts traded per day on average


Blog #day-trading

Top dividend-paying precious-metal stocks – these dividends could triple!

One Easy fix for traders getting stopped out too early or cutting profits too soon…

Day trading options

Last thing