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Gold/Mining/Energy : NORTHGATE EXPL (NGX.TO)
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To: russet who wrote (21)6/6/2002 10:54:01 PM
From: John Dally  Read Replies (2) of 158
 
Let's make it simple:

I sell call options on 400,000 oz of gold with a strike price of $300. I receive $2m.

If gold stays at $300, I make $2m.

If gold goes down to $250, I make $2m.

If gold goes down to $200, I make $2m.

If gold goes up to $325, I owe $10m - $2m => I lose $8m.

If gold goes up to $350, I owe $20m - $2m => I lose $18m.

If gold goes up to $400, I owe $40m - $2m => I lose $38m.

This is not a hedge.

On the other hand, if I BOUGHT put options on 400,000 oz of gold with a strike price of $300 and PAID $2m, then I would be hedged.

I would be guaranteed a price of $300 no matter how low the POG went AND I would enjoy all of the upside if the POG went up.
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