Ok then, I guess I can share with how I trade GLD for discussion/comparison... By the way I was born in the 80's I like to be exposed to gold but I don't like the miners. Problem with GLD is that you get no dividend and I like dividends... Also, I am terrible at making predictions about direction and need a confortable buffer... So basically I trade 2-3 months out put flies on GLD. I usually look for a buffer of 10-15% on the downside and what a gross credit ("dividend") of 3-4% per rolling period. I know its a chicken way of trading but I'm not the homerun type of guy... 12% per year on gold for me is enough. When gold is hot, its hot but when its cold its a value trap for a very very long time... But I don't need to tell you that, you actually were there for the late 70's and 80's!
i am interested in your approach as i also trade to follow a bull trend move up. my underlys have been spy, iwm, slv and some others. i keep to etfs to avoid stock shock. i have used otm short-term bps and also long longer-term otm calls. your trades are longer term itm bps with follow-on butterflys if i read you correctly. do you have any kind of a trade outline plan? how do you see your risk/reward vs what i have been doing?
Hi, I replied to your earlier post today, but it apparently got lost in the internet mists, since it never appeared on this thread. In any event, the point I was making re the technique I outlined is this. The risk/reward ratio is 2/3, since you receive a 3 point credit at inception and the total risk is 5 points. Anytime you roll up the spread (after GLD reaches the strike of the sold put), you'll receive at least a net credit of 1 point, thus reducing your total risk by that amount. Two roll ups mean you can do no worse than break even, even if gold crashes to zero. By the third roll up you have a profit of 1 point, or 50% on your initial investment. Thus, if GLD moves up 15 points during the year, that's your ROI. Each additional 5 point move up is another 50% ROI. They're not home runs, but four singles equal one homer, lol. The most important thing to remember is that ypu're a net seller of time value, the secret to making money in options. Whenever you think that GLD has slowed and/or lost its upside momentum, you can chage your strategy to selling front month iron condors, with a five point body. Great net premium. BTW, I agree with you on the miners. You never know what's really going on in those companies.
The second poster is right. Gold is rallying to record high thats why its working like a dream. Even though you are making coin you are seriously underperforming the gld stock. Im not making judgement but options is a leveraged weapon and in a bull market like this you should be using the pointed end of the sword. You can sell time premium in any highly subscribed optionable stock and get the same result.
Hi, thanks for the response. The technique I posted is not my basic strategy for options trading. I only use it when a strong upside momentum is evident. Ordinarily I concentrate on front month contracts, taking advantage of the maximum decay in net sold vertical spreads. I share your reluctance to using stocks as your underlying. That eliminates company risk and leaves only market risk. I mostly trade the SPX for that reason, for the liquidity, and also because it's an European style contract. I tend towards iron condors with wide bodies, even in volatile ETF's like GLD, because of the huge net credit and limited risk. The last week of the cycle is especially profitable, I believe because many traders have already rolled into the next cycle by then and the the big boy manipulators in Chicago have sonared in to a nearby settlement strike. If you like, I'll post my final week trade here on Nov 12th, Cheers
I understand. The thing though is that you have a certain level of confidence in your ability to predict direction... I can barely figure what the market is likely to do next month, let alone many months in advance. How far ahead do you usually build it? I would assume you also get failry low delta on your positions. If I take your first example when at 80, in effect you loose money (at exp.) if GLD rises by less than 2$. The risk/reward ratio is interesting but it would not suit me in the sense that I want to be able to be wrong by a nice margin and still end up on top. I know that in your example if you roll a few times then you are playing with the house's money but you really have to have direction right at first to get to that point
What builds confidence is renewed success. What creates success is well thought out strategies. First, please understand that determining market direction is next to impossible, no matter what you might have heard. I started out in the game as a "technician" and the more I studied the myriad technical trading schemes, thoe more I realised that none of them are worth a goat's fart. They all work until they don't, if you get my drift. The problem traders face, whether long term, short term, or day varieties is direction. It's the only way to profit and it's hard as hell. That's why the magic of options is so great. What most people don't realise is that stocks, bonds, commodities and options are all bets. But options are the only bets that you can get PAID for booking. Consider. Whether you buy or sell a stock, each side is making a bet on the future and neither side has an inherent edge. But, when you sell an option, the buyer is paying you a premium (the time value portion of the option price). It's a sucker bet, since between 80 to 90 percent of options either expire worthless or are later exchanged at a lower price than that of the original transaction. So, if you're a net writer (seller) of options the odds of winning are much in your favour. But enough of generalities, re your question on the GLD strategy I outlined, I think you haven't exactly grasped what the technique actually is. Let's take an example, using today's prices. If you buy a Jan 2012 130 put and sell a Jan 2012 135 put you'll receive a net credit of 2.90 (risk 2.10). GLD is trading at 132.40, as this is written. If it doesn't rise a penny in the 14 months between now and the 2012 expiry, you'll make 0.30. If it trades once at 135 between now and expiry you'll roll up 5 points for a credit of at least 1 point. I believe that you have to be pretty insecure not to think that might happen in that time frame. If GLD hits 140, you're even, 145, you've made 50%, etc. Good luck, even though you don't really need it, with this trade.
I get your point, although I would need to see what would actually happen if GLD hits 135 next month to see the actual value of the options. I am always a bit weary of the if x=123 then y will = 789. Also there is a certain risk of being trapped into this trade if next month gold corrects significantly. Do you have a point where you say, what the hell I'm out?
Good point. Ckeck it out when GLD hits 135. Remember though, the farther we are from expiry, the smaller the credit received for the roll up. The average of them through the year will be over 1.00 net. GLD is subject to quick and sharp reversals, so it's easy to be "spooked" on a 20 point drop in gold futures. The nice thing is, you have a year to watch it and you can NEVER lose more than 2 points. If you think a reversal is so bad that the long term trend has changed, you'll be able to close the spread for some number less than a 5 point debit. IMNSHO, that could only happen with a major change in the Dollar and I certainly don't think that's going to happen anytime soon. BTW, I'm NOT pushing anyone to make this trade. All I'm saying is, I've been using it for two years and done damned well. Cheers
I just checked the 130/135 spread... Greeks are very low on that trade... It does seem like nothing is gonna have much impact on it, its so far out in time.