Trading thoughts...
What a difference a month makes - eh?
A month ago, the HUI gold bugs index suffered a 4 day,
96 point correction bottoming on Thursday March 20th,
at HUI 424.
That was one ugly, hard and fast correction. Nearly
100 index points in just 96 hours. That's called
looking into the abyss.
Below 424 we had the former top of 401, and the very familiar
territory of longer term support/resistance of HUI 370-380.
One of the best risk:reward strategies that I've been using
is to first "sell puts" into these bottoms, giving yourself
some premium to discount your potential re-entries at lower
price points if the correction continues, a nice fat
premium to bank, if the strike price doesn't come into the
money, or.... the chance to buy those puts back for +50% to
100%+ gains on any resulting rallies.
It's a strategy that's worked well for me in trading the
financials during this hyper-volatility. ie: Fannie Mae/FNM.
We had two trading bites at the apple on this HUI pullback,
that first bottom on March 20th at 424, and the April Fools
Day bottom of HUI 417.
While no options strategy is without risk, or downside;
the beauty of "selling" puts... is that it gives you three
positive alternatives in volatile markets that you're bullish
about...
1. Bank the premium, if the market turns positive.
2. A "cushion" and in essence a discount for lower re-entries.
3. The ability to "buy 'em back" on the bounces, and lock in rich gains.
The key in this correction is that nothing really
changed for the underlying fundamentals for gold.
Message 24424444
"Gotta be selling some puts to start... "What's really changed?"
Inflation hasn't abated.
It's become clear that no "real" strong dollar policy exists.
Oil won't budge.
Food prices are on fire...riots in the streets for rice.
And the ag plays like Mosaic, Agrium, and Potash are soaring.
But....
-- isn't it "when, not if" that Oil corrects?
-- aren't we near the end of the Fed rate cuts?
-- isn't the global economy slowing?
-- and who's going to buy my gold stocks at higher prices and why?
All legitimate points, both pro and con.
So, how do you trade a market with strong underlying
fundamentals, but one in which "our buyers" just got
shaken out, and brutally so... just a month ago?
I think the #1 risk:reward strategy is the one I just
outlined above.
We "sold" puts into the first bottom on 3/20, worried
that we could very easily see a technical test of 400,
even 370 if oil collapsed.
Then on the April 1st meltdown, we bought a few calls,
but only on our favorite names.
...and now, we are beginning to cash in "just a few" of
our calls, but are buying back "most" of our puts - locking
in very, very nice gains on those prior put "sales."
Additionally, we'll be "buying" more puts into further
strength here - as a hedge against our remaining calls.
The greatest concern I have near term here...
is "who" is going to buy my gold stocks significantly
higher than the HUI 520 top we had just weeks ago...
and what's going to drive the POG, and gold stocks
significantly higher, in the next couple of months.
You must continually be asking yourself: who are my
potential buyers, and what is going to be the catalyst,
or the story, to motivate them to buy my shares from me,
at significantly higher prices than today?
Using PUT "sales" into corrections, and "buy" backs on
the rallies has been our most effective risk vs. reward
tool in this environment.
While the longer term fundamentals driving gold, and
commodities look positive. We do have a slowing global
economy, a potentially very strong recession ahead in
the US, Oil looking overdue for a correction, and perhaps
most importantly.... "our buyers" having just been
beaten, bloodied, and left penniless at the curb -
just weeks ago.
Sometimes ya' just gotta take what the market gives you,
and right now it's giving us some very nice risk:reward
plays in playing "small ball" and buying back those puts
bought into the abyss.
If you've been nibbling, don't be afraid to bank some
profits. Keep a few deep out of the money calls laying
out there... but, do not fail to take the trade
that's been given to us.
Mo later,
S.O.T.B.
PS: Yesterday's 25 point pop in the HUI gold bugs
index was great... but, it was on very light volume:
GLD etf - 8.4 million shares vs. 12.6 million average
SLV etf - 941k vs. 1.1 m avg.
ABX 9.8 million shares vs. 10.6 million avg.
NEM 6.9 m vs. 8.8 m avg.
GG 8 m vs. 9.1 vg.
The bright spot however, is that commodity bulls are
still pouring into other sectors:
In Oil, the USO saw 7.8 million shares vs. 5.1 million
average, BHP saw 8 m. vs. a 5m share avg.
And MOO saw a nice pop on 1.6 m shares vs. a 1.1 m share avg.
Bottom line for gold shares:
If you "sold" puts into the 2 corrections, you're now sitting
on some very fat gains... bank 'em...buy those puts
back here (but, let your calls run). And take "some" of your
profits and "buy" some puts into further strength here on any
continuation of the rally - as insurance against, the "calls"
you should still be holding.
But, do raise stops up behind your calls. Personally, I'll be
cashing in my near term calls on any whiff of weakness
in this rally (stops as tight at HUI 465ish).
That's what I'm doing here, and that's what's working for me...
How 'bout you?
PPS:
And how about "Ms. Piggy" (the DOW) she's looking
especially fat, her mascare is starting to run,
and that lipstick is starting to fade...
...a pig by any other name -- is still a pig.
...some are just fatter, than others.
Fed rate cut cycle nearing an end, and the
recession just now gaining traction, with
earnings numbers still way too high.
Sounds like a pretty damn good risk:reward
bet to me:
Today's play, on a beautiful spring day...
"Puts on the Pig"...and shrimp on the Barbie.
Mo later. |
