GDX, covered calls, diagonal calendar spreads, gold/silver

An interesting thing happens when the moving average convergence and divergence (MACD) is negative while the relative strength index (RSI) is below 20.  This becomes an excellent time to initiate a long stock position or long call position.  The converse is also true... If the MACD is in positive territory at the time that the RSI is also high (usually above 80) then this becomes an excellent time to sell an option contract against the long position.  

The below chart illustrates my point.  One would have initiated long position at the middle of January and March at the price of about $55.  At the end of February and beginning of April one would have sold calls against their long positions.  

Chart of GDX

This is the options chain of GDX as of May 15th with the options expiring June 18th 2011 (33 days till expiry).  For arguments sake, let's assume that we are writing covered calls and that approximately the same dollar amounts would have been made selling the contracts in end of February and beginning of April.  You would have invested $5,500 two separate times.  The first initiated position would have likely resulted in the stock being called away and you'd be ($5,500 + $187)/$5500 or 3.4% more wealthy (50% return annually for comparison only).  The second initiated position looks like your option would expire worthless and you'd be free to sell new options in the future!

June GDX options chain as of May 15, 2011

                    Strike price        Price                   Change             Bid                   Ask                   Volume                     

54.00	2.37	-0.28	2.33	2.38	278	1000
55.00	1.87	-0.29	1.87	1.88	1267	8124
56.00	1.48	-0.23	1.48	1.51	6422	5233
57.00	1.18	-0.15	1.15	1.20	5337	11361
58.00	0.91	-0.14	0.90	0.94	351	18423

I apologize for not having exact call option figures.  Real yields using more accurate dates with these methods would have netted higher returns.

So now would be a good time to buy GDX at $54.21x100xN ($5,421xN) shares or a long call option expiring January 2013 for a strike price of 40.  This would cost $17.35x100xN ($1,735xN).  N being the multiple of sizes that you'd like to purchase.

I will blog again on this topic when I'd suggest selling calls against GDX positions.

Disclosures: I have a calendar diagonal options spread on GDX.