A friend asked me for advice regarding his mother. She is 91 years old and will be moving into an assisted living facility soon. Ever since her husband died ten years ago, she has been living on her own.

Sometimes, the cost of an assisted living facility is more than an aging parent can afford. In this case, that is not a problem. Her late husband was a “gold bug,” methodically buying gold coins that he kept in a safe.

I was astounded when my friend said there is approximately $300,000 worth of gold in that safe. A year ago, it was worth about half that. Since then, the price of gold has nearly doubled.

He isn’t sure if he wants to sell it just yet. However, he also doesn’t want to risk losing a lot of that money if gold takes a dive. This is the classic dilemma that all investors face when a holding has appreciated quickly.

Gold Proxy

My friend asked me if I knew of a way he could keep his mother’s gold for a while longer yet still generate enough revenue from it to help pay for the cost of his mother’s nursing home.

The good news for my friend is that there is a way to do that, sort of. However, it would require him to sell those metals and realize the long-term capital gain.

Once he does that, he can reinvest the proceeds in the SPDR Gold Shares (NYSE: GLD) exchange-traded fund (ETF). This fund is managed to precisely mimic the price of gold.

If the price of gold keeps going up, then so will GLD. The opposite is also true. In that respect, it would be no different than keeping the gold coins in terms of value.

However, by owning GLD he can do two things to help his mother that he could not accomplish with the coins: He can protect her downside risk and generate revenue at the same time by using put and call options.

Downside Protection Plus Income

My friend would like to make sure that the current value of his mother’s gold does not fall by more than 20 percent. With GLD trading around $463 at the start of this week, that equates to a share price of approximately $370.

At that time, the GLD put option that expires a year from now at that strike price could be bought for $6 per share. If GLD falls below $370 any time before that option expires, he can force the buyer of that contract to purchase his shares at that price.

At the same time, he can sell call options on GLD to generate income. For example, the call option that expires in a year at the $500 strike price could be sold for $39 at the start of this week.

If GLD rises above $500 before that option expires, my friend would be obliged to sell his shares at that price regardless of how they go. Regardless of if that option ends up being exercised or not, he gets to keep the $39 option premium.

Repeatable Trade

The net cost of putting on this trade is $33 per share. That is the sum of the $39 option premium received for selling the covered call option, minus the $6 option premium paid for buying the put option.

That $33 of net option premium income equates to a one-year yield of about 7 percent. That is more money than he could make by selling his mother’s gold and putting the proceeds in investment-grade bonds.

Of course, the trade I am proposing isn’t an investment-grade bond, either. It comes with its own set of unique risks. If GLD falls below $370 within the next year, his mother gets cashed out and she has that money to reinvest into something else.

And if GLD rises above $500, his mother would also get cashed out, albeit at a much higher share price. However, if GLD never falls below $370 nor rises above $500 by the time those options expire, then he would get to keep his shares of GLD and repeat this trade in a year.