re: Gold & PM options strategies & shorting as insurance/hedges...
"Are you buying puts on GLD or using the 2x leveraged
short ETF "DZZ" to hedge your physical gold, or your gold
stock holding? What do you think about puts on ABX, NEM, SLW?"
"Which one would you use now?"
Message #21937 from Bylo Selhi at 5/14/2010 10:06:59 PM
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That's an excellent question, and you're thinking in the
right direction.
When gold, or PM stocks reach the top of the trading channel
and begin to show "over bought" technical signals, I usually
take a little off the table and then take a small portion of
those profits and buy some puts for insurance.
And remember: those puts are going to be a lot cheaper when
bought into strength on a rally, than on the 3rd day of a 15%
sector-wide correction.
If the underlying fundamentals are still positive (as they
are now), then I'll buy puts on GLD and GDX as insurance.
Buying puts as "insurance" is not the same as "shorting" for
a directional trade. When shorting for a trade, I'll just
short individual stocks, or ETF's directly, or use near term
puts. But when buying puts for insurance, I'll buy more "time"
and give up some leverage.
The downside to options is that they usually expire worthless,
but so does most insurance...
You don't want your house to burn down, or someone to total
your car, and you don't want to die tomorrow so your wife
can collect on your life insurance, but you still buy insurance
... "just in case."
To get the most "bang for my insurance buck," I'll usually
give up some leverage to buy some time, and buy puts further
out on the time scale, occasionally even LEAPS 2 years out
(usually to "insure" my physical gold holdings).
Given the great ride we've had in precious metals, I'm not
worried about a 10%ish pullback, I'm worried about a rogue
wave market event like we saw in 2008.
I'm not worried about a $100 trading range in gold, I'm
worried about $300 downdrafts from forced selling.
I'm worried about waking up and reading that some major bank
in Europe just collapsed and the European markets are down 9%
and S&P futures are lock limit down.
Right now for GLD, I like the January 2011 $90 Puts for $1,
they're cheap, they give me significant leverage to a major
correction, and they give me 6+ months of time.
To buy another "year," the Jan 2012 LEAP puts cost $3, triple
the Jan. 2011's. Right here and now, I'm worried about the
PIIGS sovereign debt crisis, and those $90 Jan. 2011's give me
six months of coverage for a $1.
If something unforeseen happens, and gold tanks, I have monster
leverage on a correction in gold back to the $900's.
To your question on buying puts on individual shares.
If I see an individual stock get ahead of it's story, or
underlying fundamentals, and I hold a lot of it, I'll use
individual options. Otherwise, I like the GDX, although
I do use NEM & ABX for options because of their deep liquidity.
When I sell puts, which is a bullish options strategy, I
generally always use individual stock options, because I'm
targeting individual companies I want to own, versus a
general price level for the HUI, or GDX.
Regarding double/triple levered ETF's. I use them more
for shorting, and then rarely, and only into downside
momentum - when supported by both the technicals,
and what I view to be a deteriorating fundamental story.
And most importantly... there is no one size fits all
strategy that works for everyone. If gold and pm stocks
are only 5% of your portfolio, and you own them for their
negative correlation to your other holdings... you don't
really need insurance, or to hedge your pm holdings.
If you own significant physical gold, silver and PM's,
and/or precious metals stocks are 75% of your portfolio
- then obviously, option strategies as "insurance" need
to be a big part of your overall trading and investing plan.
Given the volatility in PM stocks (much greater than in gold
itself), buying some puts "for insurance" when the sector
gets technically overbought, also allows you greater
flexibility in using stops, so you're not continually
getting whipsawed - stopped on on a pullback, and then
forced to chase a rally and buying shares back at higher
price levels.
Also, when buying pullbacks, I can't emphasize enough,
how profitable "selling puts" has been as an initial re-
entry strategy. Especially given gold & pm stocks long
term uptrend. Selling deep out of the money puts has
been a literal license to print money.
And a final thought...
For those who want to specialize in trading the PM and
commodity sectors, there are two things you MUST absolutely
learn to do, and that's to "trade short," and to master
"basic" options strategies (not complex, or advanced - basic).
Look at the volatility over the last 10 years in gold and pm's,
oil and gas, and the commodity sectors. Two of the biggest
and most profitable, multi-month long trades I've ever made
were both shorts on Natural Gas. If you love the commodity
sectors, only trading from the long side is like trying to
win the Super Bowl, but only playing offense.
What's wrong with making money in both directions?
Shorting is entirely "mental."
Start small, and like everything else, your confidence
in your ability will grow over time to where shorting
becomes as natural as trading from the long side.
I hope that helps,
SOTB
PS: And don't forget, sometimes the best risk:reward trade is
on "volatility" itself, versus direction. Option straddles and
strangles are trades on volatility (price moves in either direction).
The strangle has two different strike prices, while the straddle
has one common strike price.
PPS: And don't forget to consider using VIX as a hedge whenever it
gets cheap. You just witnessed the incredible returns it can deliver in
a very short period of time (+100% in 3 weeks). |
