There is generally an inverse relationship between gold price and the strength of the US dollar. There are many reasons for this. If investors are hesitant about the US economy, they tend to put their assets into something less tied directly to the economy, specifically, precious metals like gold. The exact opposite tends to be true. When there is strength and confidence in the American economy, the price of gold (in dollars) decreases. In 2013, gold prices sank by more than 25%, which is the largest annual drop in over 30 years. There’s about a thousand reasons why this might be.

But we don’t need to concern ourselves with the reasons to learn how to take advantage of it. We can assume that the price will rise — it already has increased more than 15% since the beginning of this year until today.

ETF

For this strategy, we won’t by buying or selling any actual gold. Instead, we will use an Exchange Traded Fund (ETF), with the symbol GLD. An ETF trades like a stock, which is great for our strategy since it means high liquidity. Since it trades like a stock, it has many of the same features that stocks have such as options, which I will address shortly. Gold is not a company, so it is not subject to the same ups and downs of corporate cycles. There are no press releases, announcement, executive scandals, quarterly earnings reports and the like that can affect the price of gold as easily as a public corporation. For this reason, gold tends to be less volatile than the rest of the market. The beta coefficient of GLD over the past 3 years has been 0.90, which indicates that has moved up and down slower than other equities in the market. The beta coefficient over the past 5 years has been 0.66, which indicates even lower volatility.

Options

If you are not familiar with options, don’t worry — I’ll go over how it works. According to Investopedia:

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go up.

Put options give the option to sell at a certain price, so the buyer would want the stock to go down.

An example will help clarify what that means. At the time of this writing (March 12), GLD is trading at $131.76 per share. There’s an option expiration coming up on Friday March 21st, 2014 — options generally expire once a month on the third Friday of the month. However, some securities, such as GLD have more frequent expiration dates (weekly, expiring every Friday).

Since one option contract is 100 shares, we need to have enough money to be able to purchase 100 shares of GLD. Given that it’s a Wednesday right now, the premiums are not as high as they normally would be on a Monday, but the same principles apply. I start my account off with $13,100 and sell a PUT at a $131 strike price. This earns me $0.94 x 100 shares = $94. Now Friday March 31st comes around and one of three things happens:

The price of GLD is above $131

Nothing happens. I’ve earned the $94 premium from selling the PUT, but it will not be exercised since the price is more than the strike price.

The price of GLD is between $130.06 and $131

Technically, I have an unrealized profit at this point. I will be assigned 100 shares of GLD with the share price of $131, totaling $13,100. But don’t forget that I earned $94 by selling the PUT, so my effective cost is $13,006 or $130.06 per share. As long as the price of GLD is above that, I’m technically profitable.

The price of GLD is below $130.06

Now I’m technically at a loss. Since my effective price per share is $130.06 and the current price is less than that, I have an unrealized loss. But life is about turning lemons into lemonade, right?

Getting Assigned

If I am assigned the shares, I see that as the potential to make even more profit. In Part 2 of this strategy, I’ll go over how to turn a profit once I’m assigned the shares.

Projected Profit

There are many strike prices to choose. I chose the $131 strike price for March 21st (9 days out), but I could have chosen the $120 strike price for a September expiration. Or perhaps the $135 strike price for a December expiration. I generally choose my strike price based on the premium — targeting 1% per week in profits. Some weeks (like in this example), I’m shy of that goal. Other weeks, I can do 2-3% (usually once I’m assigned)

So that, my dear friends is Part 1 of how how to earn 1% per week with GLD options. Stay tuned for Part 2.

About the author: Shamoon Siddiqui is a serial entrepreneur, software developer, investor and public speaker in the NYC area. To get more awesome content like this, just sign up for my mailing list.