beginners corner

Gold ETFs and Implied Volatility in Bear Markets

Lately, I’ve been writing about selling options in bear markets. No surprise here as the market is down about 10% in the past three months. This, of course, is challenging for all investors but manageable to those who have achieved the three required skills for option-selling (stock selection, option selection and position management). Market conditions will dictate and give direction as to the type of securities best-suited for our current portfolios and the most appropriate strike prices to use.

In the past several weeks we have seen the re-appearance of gold exchange-traded funds (ETFs) onto our Premium ETF Reports. Even in bear and volatile markets, there are always securities that perform well and it is imperative for Blue collar Investors to locate these underlyings.


and implied volatility

Here are the three gold ETFs and their associated implied volatility that earned their way onto our Premium ETF Watch List on 2/10/2016:

  • GDX: 53.52
  • GDXJ: 51.24
  • GLD: 19.62


Performance chart of Gold ETFs compared to the S&P 500 (3-month chart):

covered call writing in bear markets with gold ETFs

Gold ETFs vs The S&P 500


With the S&P 500 down about 10% over the past three months, the gold ETFs were up between 10% and 27%. The overall implied volatility of the S&P 500 at the time was 24.14. Before even checking option chains we know that GDX and GDXJ are much more volatile and therefore riskier than GLD. They also should generate higher premiums than GLD. Since we are presuming a bear market environment, I selected only in-the-money strike prices. Here are the calculations generated by the Basic :

covered call writing with exchange-traded funds

  • Yellow field: Time value returns (intrinsic value deducted)
  • Brown field: The amount of downside protection of the option profit (not breakeven)
  • Purple field: The breakeven point, below which we start losing money


Results of calculations

GLD produced the lowest option profit returns and smallest downside protection of those profits. Because GLD had the lowest implied volatility, this is what we expected. Conservative investors with low risk-tolerance may prefer the GLD $111 strike which generated a 5-week return of 1.5% (time value only) which was protected by 2.6% on the downside. More aggressive investors may opt for the GDX $15.50 strike which generated a 5-week time return of 3.4% which was protected by 7.8% to the downside. I created the Ellman Calculator to assist us in making the best investment decisions based on our personal risk tolerance and overall market assessment.



Gold ETFs may represent an investment opportunity in certain bear market environments. We must be diligent in evaluating the risk incurred in our trades to make sure that risk matches our trading style and personal risk-tolerance.


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Market tone

After two positive weeks, stocks had a difficult week, with bank stocks among the worst-performing. Investors are troubled that negative interest rates and other monetary policies have not been effective and that central bankers will have no tools left if economies head in the direction of recession. The Chicago Board Options Exchange Volatility Index (VIX) rose to 25.5 from 22 last week. This week’s reports were mostly positive:

  • US January retail sales rose a better-than-expected 0.2%, and December sales were revised up to 0.2% from the previously reported -0.1%
  • During her semiannual monetary policy testimony to Congress, US Federal Reserve Chair Janet Yellen said that the Fed was quite surprised by the movements in oil prices and the extent of the dollar’s strength. She did not rule out the possible use of negative interest rates
  • Yellen said it is premature to say a recession is probable, despite the fact that global financial and economic developments reflect negatively on the US economic outlook
  • A Wall Street Journal survey of economists and CEOs showed that the odds of a US recession in the next 12 months have risen to 21% from around 10% at the end of 2015 mainly due to global concerns
  • Despite chaotic financial markets and growing recession fears, US weekly jobless claims showed no signs of trouble for the US labor market
  • Initial claims for unemployment benefits fell 16,000 to 269,000, not far from the post-recession low of 256,000

For the week, the S&P 500 declined by 0.82% for a year-to-date return of – 8.77%.


IBD: Market in correction

GMI: 1/6- Sell signal since market close of December 10, 2015

BCI: After two positive weeks, we had a down week of a bit less than 1%, confirming that the market has yet to establish a firm bottom. Friday’s rally was a positive as was the consistent bounce off the S&P level of support at 1812. 1/3 of my stock investment portfolio remains in cash short-term. Favoring only deep out-of-the-money puts and in-the-money calls on active positions. 

***U.S. securities markets will be closed Monday, Feb. 15, for Presidents Day.

Best regards,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

22 Responses to “Gold ETFs and Implied Volatility in Bear Markets”

  1. Malla February 13, 2016 6:33 am #

    your comment in weekly report__ Favoring only deep out-of-the-money puts and in-the-money calls on active positions,
    pl. clarify what this means for ETF’s like QQQ

    • Alan Ellman February 13, 2016 8:22 am #


      These are defensive, conservative positions I have been entering recently due to the recent bearish and volatile nature of the markets. They apply both to stocks and ETFs. Here’s how we can use this approach specifically with QQQ:

      1- Select out time value return goals…let’s say 2%/month
      2- Select the strikes that generate these initial returns + offer downside protection of the position…ITM calls and OTM puts
      3- Use the Ellman Calculator (multiple tab) to calculate returns, breakeven and downside protection for calls and decide which best meets your goals and personal risk tolerance.

      In the screenshot below, I have the call calculations for 4 strikes that do meet our initial goal of 2% (ROO-yellow column) and offer downside protection of that profit (brown column). The column to the left of ROO shows the breakeven price point. The greater the downside protection, the lower the ROO…we choose from these 3 choices…simple.

      I will offer the put examples in the comment below…CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

  2. Alan Ellman February 13, 2016 8:27 am #


    Using the BCI Put Calculator, we look for out-of-the-money puts that meet our 2% goal. The rows with the red arrows show initial and annualized returns and the row with the blue arrow shows the breakeven point…amount stock price must decline to the breakeven. The greater the protection to breakeven (6.99%), the lower the initial (unexercised) returns (2.01%). We choose from these choices…also simple once we get the hang of it.



  3. Jay February 13, 2016 11:04 pm #

    Since our blog always moves on I want to reach back to Steve from the last post since he struck a chord with me: covered calls on dividend stocks.

    Alan, I hope it’s fair to say you do no pay much attention to dividends. You identify the best stocks in the best performing sectors and sell options according to market conditions with a monthly cash flow target in mind.

    Steve, I am a stodgy retired guy brain washed on the efficacy of dividend stocks. I make them better over writing every month.

    In my view there are growth stocks and income stocks.

    Over write income stocks. Let growth stocks run.- Jay

    • Alan Ellman February 14, 2016 8:52 am #


      We do have many members who prefer to write calls on dividend-generating stocks that also meet our fundamental, technical and common sense requirements. This is why we include % dividend yield and ex-dividend date information in the “running list” section of our Premium Stock Reports.

      There is one additional management consideration that must be mastered when using dividend-stocks. If the ex-date is prior to the expiration date of the contract sold, there is a greater possibility of early exercise. This is most likely when the ex-date is close to the expiration date, the strike is in-the-money and the time value component of the premium is less than the dividend about to be distributed.

      Covered call writing can be crafted to meet numerous trading styles and personal risk-tolerances.


      • Jay February 14, 2016 12:06 pm #

        Thanks Alan,

        One of the many things you have taught me is how to use weeklies to steer around key dates like earnings and ex-div which can impact core holdings and options positions on them. – Jay

  4. Barry B February 14, 2016 1:21 am #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 02/12/16.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The BCI Team

  5. John February 14, 2016 10:19 am #


    What are your thoughts on option writing on inverse ETFs as a way to stay with the primary market trend?



  6. David February 15, 2016 10:50 am #

    Your positions are stated as being in the money calls and deep OTM puts. Not much to work with in this market. How deep ITM calls do you like to sell in this environment? > 10 % ? Again not much out there. Lastly, would you go out 2-3 months selling puts if the option chains were rich enough to be wat OTM?



    • Alan Ellman February 15, 2016 10:58 am #


      Your spot on about the number of choices being quite low recently even combining both stocks and ETFs. This is due to the nature of the bear market environment we’ve experienced over the past 6 weeks. This will change and our Premium ETF and Stock reports will once again become robust with many more choices. We will NEVER publish candidates that don’t meet our standards.

      As far as strike selection here’s how it’s done:

      First, select a goal for your (monthly) return…say 2%. Next look at an options chain that generates that amount of time return and measure the protection also provided by that position. The higher the initial time value return, the lower the protection. As long as the position meets our goal, it is okay to consider.

      I avoid going 2-3 months out for several reasons:

      Lower annualized returns
      Status of underlying may change
      Earnings reports must be avoided


    • Jay February 15, 2016 8:46 pm #

      David and John,

      Alan’s replies never need build. But when things get volatile I shorten expiration. There is a flexibility versus yield fulcrum that teeters toward the flexible side when waters get rough.

      And there is never lost bravery in cash.

      I struggle with the inverse ETF’s only because I got them so wrong so often in the bull market. But they may be the darlings of 2016. Particularly the unleveraged ones like SH and DOG.

      The leveraged ETF’s – long and short – were designed as daily trading vehicles. There is danger holding them for longer periods because of the daily reset and the leverage of loss.

      Things go down much faster than they go up. If you can not explain to a buddy at the bar how inverse and leveraged ETF’s work – and even more complicated how options on them work – I encourage you strongly to avoid them altogether. – Jay

  7. Adrian February 16, 2016 1:50 am #

    Alan, I must first say that was quite a useful article to consider using the gold ETFs. I don’t hold any of those ones as yet but wouldn’t mind trying them if given a chance.

    I want to ask you mainly about the rolling aspects when in these high volatile times:-
    1. If I have sold an OTM option for the month and at expiry I have maxed out the return – with price above strike price and total return 4-5%+, then is it still alright to do a rollout, or would it be better to closeout and book this profit in case price falls?

    2. If again at expiry I want to rollout a stock in a volatile market, but because there are earnings for the stock later in the month then could I sell weekly options up to the ER, or is it better to first wait until the market becomes less volatile first?

    3. Is there anywhere I can go to get more stocks (for free) to analyse, as sometimes there may not be enough on the premium report to use? (not just ETF’s)

    4. Now I do have an example trade if I may get your opinion: –
    I had bought the stock ‘ITC’ at $39.46 with the Jan$40 Call option being sold. Within the last hour of expiry the price I note was at $38.66, and seeing as technicals from the “day before” were mixed, in a volatile/bearish environment I closed out the position. I am wondering if you think this should have been the best thing for me to have done?, – because I guess you wouldn’t ever let an option expire worthless and then turn around and sell the next month lower ($35) option would you? (or does this depend on how much lower next strike is?)

    Have a feeling like there could be a rally quite soon in this very challenging market as of lately.
    Thank you.

    • Alan Ellman February 17, 2016 6:43 am #


      1- If chart technicals are bullish, calculations meet our monthly goals and there is no upcoming earnings report, the conditions meet the criteria for rolling an option.

      2- Weeklys are in play to circumnavigate earnings reports. Factor in wider bid-ask spreads (if applicable) and additional trading commissions in our decisions.

      3- Yes, right in our reports in the pink fields (bumped from our list). Many of these securities just missed for technical reasons as the entire market has been responsible for the small number of eligible candidates. You can also use free screeners and set up criteria to generate candidates but you will most likely find that few meet elite standards in the current market environment.

      4- I may have allowed the option to expire worthless and then sold the same $40.00 call the next month or the $35.00 strike if calculations met my goal (2-4%/month). Buying back the option when the strike is out-of-the-money at expiration may have been an unnecessary expense.


  8. Mike February 17, 2016 3:26 am #


    Hope you can help me with a charge I ran into from my broker (TD Ameritrade) . I have started using deep in the money calls. The return is smaller but I feel safer. Today I checked my transactions for the stocks assigned. To my surprise I was charged $17 for each call assigned. I checked with the broker and they said that this is the normal charge for assigned calls and puts. My question is can this charge be avoided? If not, do you know if all brokers have a similar charge? This unexpected charge really cuts into the returns, especially the weeklys.



    • Alan Ellman February 17, 2016 6:51 am #


      This is an additional assignment commission charged to retail investors by a few of the brokerages. Gets me so angry. All they’re doing is selling the stock so why charge a higher commission? I would not tolerate it.

      Your choices are to:

      1- Contact your broker and explain your trading style and assignment fees of $17.00 simply does not align with how you trade. Tell them you are okay paying the typical fee for selling a stock. If you do not get a satisfactory response….

      2- Look into changing brokers…many do not charge that higher fee.


    • Jay February 17, 2016 4:10 pm #

      If you choose to shop brokers give Options House a look. I moved there from TD Ameritrade. – Jay

  9. Rainer February 17, 2016 11:07 am #


    First of all, thank you very much for your answer of my last question. This was very helpful!
    I have another (beginner question) and would be happy if you could stear me in the right direction.
    How do you determin the right time to decide if to roll out, roll out and down/up, …?
    I am currently watching some stocks from last week (e.g. ANFI) and it looks like within the last 3 days the ask price went up steadily while ANFI is still hovering around the same price.
    When do you wait until the last moment – Friday- to do this?
    Do you pass up a moment that looks great and fits the numbers to do this?

    Thank you so much for your support,


    • Alan Ellman February 17, 2016 12:44 pm #


      I will rarely roll out and down. Rolling down may occur in the same contract month based on our exit strategy parameters but I will generally replace a declining stock once the contract expires. Rolling out or out-and-up are two strategies used frequently on accelerating stocks. Rolling out and up is reserved for the most bullish of circumstances.

      Most of the time rolling out or out-and-up is best executed as close to 4 PM ET on expiration Friday as possible (within a day or two is okay). I usually start my rolling strategies about 2 PM ET on expiration Friday unless I am traveling and then I execute the trades on Wednesday or Thursday prior to expiration. The reason is the way Theta (time value erosion of the premiums) works. Time decay will be greater for the near-month option than the next month option so we generally benefit by waiting.

      Now, ANFI is a great learning example. Note that in our member report, the next earnings date is projected to be March 7th. Rolling to the March contracts will put us at risk of a disappointing earnings report. In these situations, I will allow assignment. The other choice is to buy back the option near 4 PM ET on Friday, wait for the report to pass (in expectation of a positive surprise) and then write the call. The safer approach is to allow assignment.

      As a learning tool, let’s assume no earnings report and check the options chain for rolling out (see screenshot below), If we sold the $10 strike as shares are currently trading at $10.64, our cost basis at this point in time is $10…this is what are shares are realistically worth based on our option obligation. Rolling out will result in an options credit of $0.35 (less commissions) or a 3.5%, 1-month return. We have a 6% protection of that profit ($0.64/$10.64).

      We note that the $1.10 cost to buy back the near-term option consists of $0.46 time value ($1.10 – $0.64). This component will tend to decrease as we approach 4 PM on Friday whereas the time value component of the next month option will not decline as much.

      One more point: Note the bid-ask spreads of $0.45 and $0.65. We definitely should make an effort to negotiate those prices with the market-makers by leveraging the “Show or Fill Rule” (see pages 225 – 227 of The Complete Encyclopedia-classic and pages 122 – 124 of The Complete Encyclopedia Volume 2).



  10. Alan Ellman February 17, 2016 5:39 pm #

    Premium members,

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.

    The best-performers are the gold ETFs which have high implied volatility. The inverse ETFs are declining as the S&P 500 has appreciated in value by 5.25% in the past 3 trading days

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  11. Adrian February 18, 2016 5:25 am #

    Alan, can I confirm/ask a few things you say, so first I can check over the stocks in the pink lists but only over those that have passed all but the chart technicals and indicators?, and when these technicals turn up then that is the time to think of using them too?(is this what you meant?)
    – So it is alright then to re-sell an option that expires OTM even if the market tone/ chart technicals are mixed to bearish?(the higher $40C in that example)
    – Why also would you wait until market volatility to ease before entering new positions on monthly contracts, but the weekly options are alright to enter straight away?
    If you could just tell me what you think. Thanks

  12. Alan Ellman February 21, 2016 6:49 am #


    You asked about scenarios when market conditions resulted in a modest list of stocks that passed our rigorous standards. Next best would be to check the stocks in the pink cells that may have “just missed out” from a technical perspective. I am not encouraging this as a routine procedure, just responding to your inquiry. Also, in most weeks, our list will be more robust as it is in the 2/20/2016 report compared to the 2/13/2016 report.

    It is okay to sell OTM strikes in bearish/volatile market environments depending on how bearish and how chart technicals look. I will usually select strikes on a percentage basis…some ITM and some OTM.

    We can wait for volatility to subside but this could take us out of the market for significant time frames. Adjusting our techniques to these conditions is another approach…the one I am comfortable using.

    Sometimes, we will need to move out of a stock when selling Weeklys but we must be cognizant of the calculations. Up front, we are accepting 4-5 times the number and amount of commissions when selling Weekly call options compared to Monthlys. If we also change underlying securities, those commissions would end up 8 -10 times those from selling Monthlys. In your example, the stock price dipped $0.80 by expiration and so may remain in play for OTM or ITM next month calls.


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