Recovery options from Stock loss

[cavinvestor]

Hello!

I got Barrick Gold Stock (GOLD) at an average of $30 (all time high) 6 months ago and every since it is ranging at $23-24. Which is roughly $5k loss!

 What are the best options for me out of the below ones.  Appreciate if you suggest any other better options as well

1) Keep it long term - (20k locked in).  Most analyst review says hold or buy at this point.
2) Sell it and use it to write off 2021 tax period:  Frees up cash so I can put it somewhere else
3) Covered Call Sell options - Weekly return for 26$ call sell is $30 premium which isn't worth it.
4)  Any other option?

Thanks in advance

[PDXTabs]

1) Keep it long term - (20k locked in).  Most analyst review says hold or buy at this point.
2) Sell it and use it to write off 2021 tax period:  Frees up cash so I can put it somewhere else

I'm not sure if this is the provably correct approach, but I'd probably hold it for a while to see if it goes back up. There's still time to sell and take the write off on your 2021 taxes. I'd definitely sell this year.

[cavinvestor]

My only worry with this is if the stock goes down further then it would be a big loss - The average price between 2017-late 2019 was $15

[MustacheAndaHalf]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

[cavinvestor]

oh wait. I am a newbie to options and so far have done only covered calls.  Let me re-read it to understand what you are saying and I'll get back with questions :)

BTW Thanks for that link and you are right. I had bought that after seeing price action chart :(

Thanks again

[vand]

Just one look at the chart shows what sort of volatility you can expect. The current drop on Barrick at the moment doesn't qualify as anything other than a healthy correction.

Gold miners are a leveraged play on gold - IMO you should not hold gold miners without first a substantial holding unleveraged gold, either ETF or physical.  If you don't have a good reason for owning gold then you should not have a place for gold miners.. even if Warren Buffett bought some.

[RWD]

Would you buy it now at the current price? If not you should sell.

[cavinvestor]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

Just did a quick math

- Sell current GOLD at a loss of ~$5k
- IAU buy deep in the money call at $7900
- 20,000 - 5000 = 15,000.  15k-7900 = 7100

They key here is "If I thought gold would beat other portfolio".  The breakeven point for this to work is $18. The all time high was $19.7 (in July 2020).  Worth the risk for 2 years I think.

The upside
- Leverage
- Tax write off on GOLD
- Invest the rest in 7100 instead of putting all 15 in IAU
- Investing 15k in tech stock is risky at the moment (I thought the same in May 2020 that pandemic would be a good bet for GOLD :( )

The downside
- IAU tanks in next 2 years

Am I thinking right?

[cool7hand]

We use Ray Dalio's All Season's (aka All Weather) Portfolio. Give it a Google. It uses 7.5 percent gold. Gold has definitely flown high this year, but in doing so, it allowed us to periodically sell it to buy more stock while many fled stock for gold. If I was you, I'd buy more gold as it goes down and include it as part of my portfolio. It is both a hedge against inflation and a bear market.

[MustacheAndaHalf]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

Just did a quick math

- Sell current GOLD at a loss of ~$5k
- IAU buy deep in the money call at $7900
- 20,000 - 5000 = 15,000.  15k-7900 = 7100

They key here is "If I thought gold would beat other portfolio".  The breakeven point for this to work is $18. The all time high was $19.7 (in July 2020).  Worth the risk for 2 years I think.

The upside
- Leverage
- Tax write off on GOLD
- Invest the rest in 7100 instead of putting all 15 in IAU
- Investing 15k in tech stock is risky at the moment (I thought the same in May 2020 that pandemic would be a good bet for GOLD :( )

The downside
- IAU tanks in next 2 years

Am I thinking right?

Right, since the gold miner isn't the same as owning gold, you can realize the capital loss on the gold miner stock (GOLD).  So taking $15k, you plan to put $7.9k in call options in IAU (10 contracts) and then what is your plan for the other $7.1k?

I don't currently invest in gold, so I'm providing these ideas to help you invest in what you believe in.  Investing in gold now means predicting inflation fears while you own the call options.  Maybe that's a good guess with the amount of money pumped into the stock market and stimulus checks - but I don't know either way.

When you buy $7.9k of call options (10 contracts), you can view it two ways.  One way, is as 2x leverage, like someone with 100% in equities/commodities.  The other, for someone with a significant cash/bond allocation, is getting the performance of $15k of stock with less invested.  If the $15k of shares lose 2/3rds of their value, that's a 10k loss for a stock holder, but your total loss is $7.9k.

If you plan to do this more than 2 years, you'll have to learn more complex sides of options ("rolling over") - when is the best time to sell the old options and buy new ones?  It involves a cost.

Just a quick lesson on time value.  Add up the strike of the option and the cost ($10 + $7.90) and you get $17.90.  That's $0.21 above the stock price, so that $0.21 is the "time value".  I view it as a percent of the stock price (1.2%), but others might split into intrinsic value ($7.69) and time value ($0.21) and say it's 2.65% of the total investment of $7.90.  In any event, if the stock/ETF goes nowhere, that $0.21 gradually fades away over time.  Others will have better advice on when to sell in that situation.

[cool7hand]

When is gold taxed as a collectible v. an equity?

[reeshau]

Would you buy it now at the current price? If not you should sell.

+1

Don't let the tax tail wag the investing dog.  Invest according to your thesis on whatever you own--tax treatment is a tactical decision after you have decided to act--the second decision.

[cavinvestor]

Thanks everyone

[vand]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

Just did a quick math

- Sell current GOLD at a loss of ~$5k
- IAU buy deep in the money call at $7900
- 20,000 - 5000 = 15,000.  15k-7900 = 7100

They key here is "If I thought gold would beat other portfolio".  The breakeven point for this to work is $18. The all time high was $19.7 (in July 2020).  Worth the risk for 2 years I think.

The upside
- Leverage
- Tax write off on GOLD
- Invest the rest in 7100 instead of putting all 15 in IAU
- Investing 15k in tech stock is risky at the moment (I thought the same in May 2020 that pandemic would be a good bet for GOLD :( )

The downside
- IAU tanks in next 2 years

Am I thinking right?

Whenever I see people attempting to shortcut and cheat their way out of a situation by devising options strategies I see warning flags everywhere. You are speculating because short term price movements mean more to you than consistent long term accumulation of wealth-building assets. 

Step back and reexamine some very fundamental basics - savings rate, budgeting, goals, risk tolerance & asset allocation etc. You should not care what any particular part of your portfolio does, only what the overall portfolio does. In a well diversified portfolio not everything will do well at the same time.

[Financial.Velociraptor]

If you think the bottom is in, you can try a "ratio spread", sometimes called "stock repair".  On the 18JUN2021 expiry, for every 100 shares you own, buy one 24 strike call and sell two 27 strike calls.  If the stock is at 27 at expiry, your exit position price would be $30.00, or break even.  You would likely take a small credit for this position, thus earning yield while you wait.  If it trades sideways, you can take another small credit to try again at a later expiry.

This strategy combines a covered call with a bull call spread to leverage gains up to 27.  It is profitable at any price above the low strike of 24, although you probably want to sell the long call the last day/week before expiry if the high call is not in the money.

Danger is if stock continues to decline you continue to suffer.

[Tyler]

When is gold taxed as a collectible v. an equity?

Stock in companies that mine gold (such as Barrick Gold) is taxed as an equity. Physical gold bullion (including ETFs like IAU and GLD that stockpile gold in 3rd party vaults) is taxed as a collectible. BTW, the taxation of collectibles is very commonly misunderstood. Here's some extra info related to gold if you're interested.

[MustacheAndaHalf]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

Just did a quick math

- Sell current GOLD at a loss of ~$5k
- IAU buy deep in the money call at $7900
- 20,000 - 5000 = 15,000.  15k-7900 = 7100

They key here is "If I thought gold would beat other portfolio".  The breakeven point for this to work is $18. The all time high was $19.7 (in July 2020).  Worth the risk for 2 years I think.

The upside
- Leverage
- Tax write off on GOLD
- Invest the rest in 7100 instead of putting all 15 in IAU
- Investing 15k in tech stock is risky at the moment (I thought the same in May 2020 that pandemic would be a good bet for GOLD :( )

The downside
- IAU tanks in next 2 years

Am I thinking right?

Whenever I see people attempting to shortcut and cheat their way out of a situation by devising options strategies I see warning flags everywhere. You are speculating because short term price movements mean more to you than consistent long term accumulation of wealth-building assets. 

Step back and reexamine some very fundamental basics - savings rate, budgeting, goals, risk tolerance & asset allocation etc. You should not care what any particular part of your portfolio does, only what the overall portfolio does. In a well diversified portfolio not everything will do well at the same time.

I think you might be right, Vand.  For someone buying Barrick Gold and realizing it hasn't gone well, call options might really be "doubling down", gambling.

If you think the bottom is in, you can try a "ratio spread", sometimes called "stock repair".  On the 18JUN2021 expiry, for every 100 shares you own, buy one 24 strike call and sell two 27 strike calls.  If the stock is at 27 at expiry, your exit position price would be $30.00, or break even.  You would likely take a small credit for this position, thus earning yield while you wait.  If it trades sideways, you can take another small credit to try again at a later expiry.

This strategy combines a covered call with a bull call spread to leverage gains up to 27.  It is profitable at any price above the low strike of 24, although you probably want to sell the long call the last day/week before expiry if the high call is not in the money.

Did you mean put options?

You mentioned buying $24/sh calls, and selling twice as many $27/sh calls.  If the stock rises to $35/sh, that leaves you with $9/sh of intrinsic value from the call you bought, but owing $16/sh of intrinsic value for the call options that were sold.  The pain gets worse as the stock goes up.

[ChpBstrd]

If you were speculating, take the loss and return to your AA.

If this gold exposure is part of your AA, there's no reason to change your AA just because one of the components went down. It's supposed to do that. Presumably your tech stocks more than made up for the gold stocks. Check to see if your AA has deviated from plan and then rebalance if needed.

It could be that in six months everyone again is asking how they can find uncorrelated assets, and there you'll be holding a stock with a beta of 0.04.

[Financial.Velociraptor]

Another option is what Berkshire did, and sell half your shares.
"... Berkshire had acquired 21 million shares in gold miner Barrick Gold (GOLD)"
"... the fact that the position was only worth around $700 million was a strong sign that it was one of Berkshire's other portfolio managers that acquired the stock rather than Buffett himself"
"This means that from the very beginning, it was possible that the holding was not going to be a long-term position."
https://finance.yahoo.com/news/lessons-berkshires-barrick-gold-sale-175409501.html


You could also invest in gold ETFs, instead.  Meaning you sell all your shares of GOLD, gaining a tax benefit, and switch to gold ETFs.  IAU has the lowest expense ratio (0.15%).

If I thought gold was going to beat my other portfolio choices, I might buy deep in the money call options.  iShares Gold Trust ETF (IAU) has call options expiring in Jan 2022 and Jan 2023:
2022 call option with $10 strike costs $7.90, which is 1.2% higher than the current stock price.  So for 2.2x leverage for 1 year, you pay 1.2%.
2023 call option with $11 strike costs $7.20, which like paying 2.9% to gain 2.45x leverage for 2 years.

Just did a quick math

- Sell current GOLD at a loss of ~$5k
- IAU buy deep in the money call at $7900
- 20,000 - 5000 = 15,000.  15k-7900 = 7100

They key here is "If I thought gold would beat other portfolio".  The breakeven point for this to work is $18. The all time high was $19.7 (in July 2020).  Worth the risk for 2 years I think.

The upside
- Leverage
- Tax write off on GOLD
- Invest the rest in 7100 instead of putting all 15 in IAU
- Investing 15k in tech stock is risky at the moment (I thought the same in May 2020 that pandemic would be a good bet for GOLD :( )

The downside
- IAU tanks in next 2 years

Am I thinking right?

Whenever I see people attempting to shortcut and cheat their way out of a situation by devising options strategies I see warning flags everywhere. You are speculating because short term price movements mean more to you than consistent long term accumulation of wealth-building assets. 

Step back and reexamine some very fundamental basics - savings rate, budgeting, goals, risk tolerance & asset allocation etc. You should not care what any particular part of your portfolio does, only what the overall portfolio does. In a well diversified portfolio not everything will do well at the same time.

I think you might be right, Vand.  For someone buying Barrick Gold and realizing it hasn't gone well, call options might really be "doubling down", gambling.

If you think the bottom is in, you can try a "ratio spread", sometimes called "stock repair".  On the 18JUN2021 expiry, for every 100 shares you own, buy one 24 strike call and sell two 27 strike calls.  If the stock is at 27 at expiry, your exit position price would be $30.00, or break even.  You would likely take a small credit for this position, thus earning yield while you wait.  If it trades sideways, you can take another small credit to try again at a later expiry.

This strategy combines a covered call with a bull call spread to leverage gains up to 27.  It is profitable at any price above the low strike of 24, although you probably want to sell the long call the last day/week before expiry if the high call is not in the money.

Did you mean put options?

You mentioned buying $24/sh calls, and selling twice as many $27/sh calls.  If the stock rises to $35/sh, that leaves you with $9/sh of intrinsic value from the call you bought, but owing $16/sh of intrinsic value for the call options that were sold.  The pain gets worse as the stock goes up.

Own 100 shares.  buy one 24 call, sell two 27 calls.  At expiry at prices above 27, you liquidate your position at a net price of 30.  That is you sell your 100 shares for 27, and buy 100 more at 24 only to sell them again at 27 immediately.  The underlying you hold hedges the second the short call...

[cavinvestor]

Alright!  Thanks. I watched multiple videos and did a spreadsheet analysis just to make sure.  I feel that the stock may not go down drastically but mostly swing next 6mo.  I'm gonna give it a go to this strategy instead of taking a direct loss.

Thanks again for everyone!

May be I should look into GME options lol. just kidding :-)

[ChpBstrd]

Thanks for the explanation @Financial.Velociraptor . That strategy is new to me. I suppose the goal is for the covered call to pay for the cost of the bull spread?

[Financial.Velociraptor]

Thanks for the explanation @Financial.Velociraptor . That strategy is new to me. I suppose the goal is for the covered call to pay for the cost of the bull spread?

That is correct.  You ordinarily want to take a net credit of a few pennies a share or at least take a very small debit.