GDX covered call - Time to sell the option contract!

If you read my previous post, I recommended opening a long position in the ETF GDX on 5/15/11 with the intent that in a few weeks one should sell options against it.  If you bought it then, the price was $54.21 and it is now $57.10.  So congratulations, you just made 5.3% on your investment.  Not bad for 11 days.  But now for the next step.  As you can see the relative strength index (RSI) has just approached 80, so it's time to sell a call against our long position.

Here is a brief sample of the near the money options contracts that expire on July 16th.

July GDX options chain as of May 26, 2011

                    Strike price        Price                   Change             Bid                   Ask                   Volume                     

57.00	2.37	-0.11	2.34	2.39	97	288
58.00	1.87	-0.14	1.88	1.90	200	2603
59.00	1.48	-0.18	1.49	1.53	121	812
60.00	1.19	-0.13	1.17	1.21	1156	9834

So here's the risk/reward parameters of selling the $57 strike price.  As you can see the maximum profit potential of this trade is 9.8%, and we have a 9% downside protection.  This would be a moderately bullish strategy.

My last example is of selling the $60 call.  This is more bullish as it offers more upside potential, but at the cost of downward protection loss.  This is illustrated in the chart below.  Here we have a 13% upside potential and a slightly reduced 7% downside protection.

By the way, I'm inclined to go with the more bullish option that I explained.  More blogs explaining my strategies will follow as new developments unfold.