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Trade Alert – Rolling profits into a risky options trade

June 25, 2013 by Cody Willard

Talk about some volatility. We’re watching 2-3% daily moves in the US stock markets and 5% plus daily moves in Asia. When volatility is this high, and when you were buying VIX calls back when volatility was extremely low just a few weeks ago, it’s time to take profits and close the trade. I’m closing out my VIX long position today.

Meanwhile, you know that I don’t trust the gold ETFs and other precious metal “paper” trading vehicles. But I do think the GDX Gold Miner ETF is valid since it’s promising stock shares in publicly traded companies and not promising physical gold and silver which might or might not actually be owned and in the vaults. I’ve often advised against owning gold miner stocks because they are often high-beta versions of gold itself, meaning when gold drops 30% like it has, gold miner stocks will drop maybe twice that much, 60% or more.

Indeed, take a look at this chart.

Screen Shot 2013-06-25 at 7.18.18 AM

So here’s what I’m doing. I’m taking the proceeds of that winning VIX calls trade and using them to buy slightly out of the money call options in the GDX (strike prices from $25-28 and expiring in January 2014, paying about $2.50-$1.50 respectively each). See, if gold comes back 10-20% in the near-term, or even if it just finally finds a bottom, the GDX can rally back to its recent higher lows. Meaning, the GDX can pop 30% in the next few months if gold can just find its footing and/or actually rally. In some sense then, the GDX is a good levered-up vehicle for trading gold into year-end. Using call options for the trade makes it even more levered-up. So as usual, this options trade is very risky and probably more so than usual. But when I see an opportunity with a good risk/reward ratio like this, I want to sneak in for a trade.

 

 

Related posts:

Trade Alert: Some Electric Vehicle and Space Short Ideas
Trade Alert: A flexible surprise about JD
Trade Alert - Short-term short trade (and trading strategies for the Fiscal-Cliff Dead Horse)
Trade Alert: Taking some profits on the SPY calls
Trade Alert: Strategies For This Blow-Off Top Market
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Filed Under: Trade Alert

Disclosure: At the time of publication, the firm in which Willard is a partner and/or Mr. Willard had positions in some of the stocks mentioned above although positions can change at any time and without notice.

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This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or cryptocurrency or token any other product or service by Cody Willard or any other third party. Furthermore, nothing in this is intended to provide tax, legal, or investment advice and nothing in this should be construed as a recommendation to buy, sell, or hold any investment or security or cryptocurrency or token or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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