Having extra money in one’s pocket is often a stressful situation when a precious metals bull market surges even higher. Investors may worry that they will then be buying at peak prices. This problem is quickly solved by selling puts in the options market. It allows investors to purchase precious metals at ten to twenty percent discounts.
Selling a put option involves agreeing to purchase an asset at a certain price during a predetermined time. Investors can agree to purchase a share in a gold or silver fund at a price lower than the current price of the precious metal. For example, if a share of a silver fund is currently $18 they want to purchase 100 shares at $17 each in five months, they can sell a put option for a specific silver fund with a $17 strike price and an expiration date that is five months into the future.
It the option currently trades at $1 per share, the investor sells one option contract because one contract equates to 100 shares and that is the amount sought. The investor receives $100, which is $1 times 100 shares. If the price of silver remains higher than $18, no one will purchase the shares at $17, so the investor keeps the $100 gained from selling the put.
If the price of silver decreases to less than $17 over the upcoming five months, the broker will purchase the 100 shares of the silver fund for the investor at $17. The real cost to the investor is actually $16 per share since he or she received $1 per share under the options put. The investor must have the $1,700 available to purchase the shares at the end of five months. Under this example, the investor saves $200, the difference between the $1,800 current cost for 100 shares and the $1,700 option contract cost, plus the $1 per share received on the put option.
In this example, selling a put option and waiting five months to purchase silver resulted in a $200, or 11.1 percent, discount. Investors should be aware that transaction costs will affect the amount of cost savings. To save additional money, they can enter into longer contracts, providing them with an up to 20 percent discount based on current prices.
Source: Hunt, Brian. The GrowthStock Wire. How to Buy Silver at a 10%-20% Discount.