Tuesday, December 1, 2009

Thinking about GLD

Here are my thoughts in deciding how to handle GLD:

The present loss per share of stock is 0.31 if sold now. I am already at maximum loss at expiration, which is 0.43. So by selling now, I immediately cut my max loss by 0.12.

GLD nowadays is moving by 1.38 per day (the Average True Range). A drop of that magnitude shaves my loss by 0.05. It would take six days of downward movement from the present level to bring the position back to profit.

Conversely, a rise in price increases the loss by 0.01.

But, the rise in the price of GLD has left the position vulnerable to time decay, a characteristic of options, especially those near expiration, where they lose value every day even if the price doesn't change. This is called the theta. At the outset, the position had positive theta, meaning it gained value with each passing day. Theta is now negative, and it's losing about 0.006 (about half a cent) daily.

So, from all of that I conclude that the numbers give the advantage to waiting a bit more, since the reduction in the loss per average daily move downward is of greater magnitude than for upward moves or time decay.

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