In response to Monday’s Tales of a Technician post about portfolio insurance, Alondra asked if the Bear Tamer system could work with commodities. Today I’m going to explore the idea.

First, a review of the Bear Tamer is in order. The strategy consists of buying a one-year, 10% OTM put on a stock position and then selling monthly far OTM covered calls to help finance the put cost. The aim is to drastically reduce the risk and volatility of owning stocks. In the Bear Market Survival Guide monthly mastermind meetings, we’ve been managing the system on stock ETFs like IWM and EEM. And, well, it works as designed.

I prefer using it on broad market ETFs because it allows us to sidestep the tricky question of stock selection. But, if you wanted, you could deploy it on any old stock as long as it has liquid options.

Protecting Gold, Oil, and the Like

Now to the question at hand. Does the Bear Tamer work for commodity ETFs like GLD, SLV, USO, and UNG?

The short answer is an unsatisfying “kind of.” For the long answer, read on.

First off, not all commodity ETFs are created equal. GLD and SLV are superior funds to USO and UNG because they don’t suffer from drag. And I’m not talking about the RuPaul kind. If you want deep dive on the topic, read this and this.

The first takeaway is that USO and UNG aren’t great buy-and-hold vehicles to begin with because of their inherent flaws. With the Bear Tamer, I only want to own an asset that I believe will rise over time, and I’m personally not confident that will happen with USO and UNG. Admittedly, I could be wrong.

Second, if you’re going to deploy the Bear Tamer, then whatever asset you’re using has to have enough option premiums to move the needle. You can’t be selling covered calls for 10 cents because it’s really not worth the effort. Unfortunately, SLV and USO carry small premiums. UNG is actually decent.

Here are the strikes I would normally use for the Bear Tamer:

USO @ $11.19. Sell Nov $13 call for 7 cents

SLV @ $16.37. Sell Nov $18 call for 12 cents

UNG @ $18.88. Sell Nov $23 call for 26 cents

GLD @ $140.81. Sell Nov $149 call for 66 cents

Can you spot the crappy covered call candidates?

As you can see, USO and SLV leave much to be desired. To be fair, you might be able to make something work on USO if you sell higher delta calls, so it’s more the drag that disqualifies that one for me. I’ve tried selling naked puts and covered calls with SLV, but I couldn’t make it work. The premiums were simply too low. Or, maybe I’m an idiot. I guess both could be true.

Of the four, GLD is the one that most intrigues me. Here’s what a Bear Tamer would look like:

Long 100 shares GLD @ $140.81.

Long Jan 2021 $127 protective put @ $2.60

Short Nov 2019 $154 call @ 30 cents

A Golden Bear Tamer

And here’s the risk graph:

Here are my observations:

First: OTM puts on gold are dirt cheap. No one thinks it’s going to crash, so you get insurance for peanuts. Paying $2.60 for 14 months of protection amounts to 1.8% of your total investment in GLD. If we were talking about SPY, that number would be more like 3% to 5%.

Second: To pay for the put, you only need about 18 cents per month from the call side. But selling covered calls on a $140 asset for only 18 cents seems stupid. So, I chose 30 cents as the minimum, and I’m still only selling a 7 delta. If this were SPY, I would have needed to sell a 15 delta call each month to fully pay for the put.

Third: You have my blessing for using the bear tamer on GLD, but it definitely lacks the pizzazz of doing it on a stock. The call premiums are depressed, but I guess so too are the put prices, so whatever. I bet most people who buy gold aren’t worried about a crash anyway, so they don’t feel as much of a need to have insurance as the everyday stock investor.

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