Gold strategy

[PhilO 0]

Every trader has his edge. Takes on average 3 years to develop, so be patient.

I'm not sure I understand your statement. Can you give examples of individual edges (advantages) that are unique to particular successful traders? Preferably not examples of billionaires-by-trading since their capabilities are very rare.

[rtg24 0]

Every trader has his edge. Takes on average 3 years to develop, so be patient.

I'm not sure I understand your statement. Can you give examples of individual edges (advantages) that are unique to particular successful traders? Preferably not examples of billionaires-by-trading since their capabilities are very rare.

I wish I could. It's very rare - at least I have found it very rare - that people would talk about their edge, and often in trying to see what an "average" (but still successful so still the best out of his 50 or so starting class a decade ago) trader does to win you get it wrong. It could be reading mispricings instinctively (this is what takes 3 years to develop), it could be bringing skills from one market to another. Some people are successful penny chasers (and are good at running away from the steamroller); others are addicted to knowledge and are very good at reading the decisions of people and drawing links between history and current situations; still others will be mathematically superior to their peers and will spot complex mispricings that they will extract in very illiquid instruments from bank structurers intent on screwing them (this is not a game for the faint hearted, nor one that can be easily scaled). At the very simplest level, I've seen someone make money because he has learnt to spot when volatility is too high vs. when things really are blowing up; his positions are as simple as buying or selling a straddle according to his volatility view.

One example is a phenomenal head of a trading desk in commodities, who spotted that the inverted curve in his market meant roll yield for "merchants" (i.e. most of the players) had just turned negative; he thus shifted all his hedges to the delivery month and played the curve instead of rolling the forward month until delivery or closing the position. Several friends of mine also spotted early on that Apple was a different company and have been long for several years, to their great advantage - their edge was understanding both how growth companies should be valued, and the potential that an extraordinary CEO possesses and how it will pan out. I repeatedly, over these several years, told my friends that he couldn't go much further, that this was the last innovation; right until Jobs' retirement (and actually past it in some cases) they held on to the stock and were amply rewarded. Most of these were young engineers.

I strongly recommend the "Market Wizards" series to see how young traders developed their edge, even if most of the strategies described no longer work and most of the traders depicted have retired.

[PhilO 0]

I strongly recommend the "Market Wizards" series to see how young traders developed their edge, even if most of the strategies described no longer work and most of the traders depicted have retired.

Very interesting, thanks for the elaboration. I actually did read that book, and its successor, years ago, when I was more interested in trading.

[rtg24 0]

There's a third one, and two exceptional books (but at a higher level) by Steven Drobny called Invisible Hand and Inside the House of Money. Both are must reads for anybody interested in how the world works.

[jordanz 0]

I sold a big portion of my GLD today. I believe the long term target for gold is still well above $2,000 but I think the next few weeks will be incredibly volatile. Yesterday's Fed move was a semi-stealthy short term interest rate increase. Also, people are selling their gold into cash to cover losses.

[Joss Delage 0]

Betsy,

I think I'm going to buy a few lg term calls on gold (in my 401(k), a few % of total). I know the theory behind call pricing, but I have never traded them. What should I look for in terms of ticker and the like to make sure I'm buying the right stuff (long term call options)?

I was thinking of buying calls that are just out of the money - what do you think?

[Betsy Speicher 0]

Disclaimer: This is not financial advice, which I am not legally allowed to give. This is merely what I am doing.

I go for long-term in-the-money calls on GLD which have an active market. I've been in January 2012 calls for more than a year, but I will shortly be selling them and buying January 2013s at a striking price 15-20 points below the current market. I look for a striking price that is an even multiple of $5 such as January 2013s with a striking price of 140.

My buying and selling strategy takes advantage of the volatility of the option prices from day to day. I have a target percent of my assets in cash (= my age + a risk percent) and the rest in equities (the GLD calls). I buy and sell to maintain the target equity percent by selling one option contract when the value of my assets goes up the value of one contract over my target percent and buying one option contract when the value of my assets goes down the value of one contract under my target percent. I set limit orders for the buying and selling and reset those orders when one of them is exercised and at least once at the end of the trading day. This buying and selling strategy has the result of buying low and selling high in a volatile market.

If I were a 40 year-old starting out, I would keep at least 40% of my investable assets in cash or money market funds. If I were not willing to lose the rest, I would add an additional risk percent to my target cash percent until I were comfortable with the risk. For instance, if I didn't want to lose more than half of my money, my target would be 50% cash and 50% GLD options. If I had $100K to invest, I would buy $50K worth of January 2013 with a striking price of 140. If they cost $30, a contract on 100 shares would cost $3000 and I could buy 16 or 17 of them.

[Joss Delage 0]

Thanks Betsy. Quick question: why do you buy options in the money?

[Betsy Speicher 0]

Thanks Betsy. Quick question: why do you buy options in the money?

There is less risk. Even if gold drops $100 (and GLD drops $10), an option that is $15 in the money will still be worth something.

They are more sensitive to market fluctuations. Solidly in the money options tend to move with the price of GLD and out of the money options only move a fraction of that. Thus, if GLD goes up or down $1, an in the money option that costs you 1/5 to 1/10 the price of that GLD will tend to move up or down $1 too. Nice leverage.

In the money options have a smaller premium. You can calculate the Premium = Striking Price + Option Bid Price - Current Market. The Current Market Price of GLD is 167.90. Comparing January 2013 options

Striking Price of 140 has an Option Bid Price of 37.35 so the Premium = 140 + 37.35 - 167.90 = 9.45.

Striking Price of 170 has an Option Bid Price of 21.05 so the Premium = 170 + 21.05 - 167.90 = 23.15.