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Tuesday, November 29, 2022


Spinning Straw Trades Into Gold

Here's a fun chart that illustrates why I like gold.  Don't take it too seriously but do take seriously that this is exactly what happened to the US when we got embroiled in the Vietnam war and Nixon took over and the country plunged into debt and we cut taxes to the rich and dropped the gold standard.  The ratio of the Dow to gold dropped from 47:1 to 2:1 but the middle of Reagan's first term.  During the Clinton years, as we moved towards a budget surplus, the ratio of Dow to gold jumped from 7:1 in 1993 to 40:1 in 2002 but, since then, has dropped back to 15:1.  The bottom line is:  If you are worried about the markets – buy some gold.  If you are worried about the dollar – buy some gold.  If you are worried about terrorism – buy some gold

I still think we should get a correction in gold back to $875 (no longer $850 as the trendline has been yanked up) but we're not hedging gold because we are worried it will hit $1,000, we are hedging because we are worried it will hit $2,000.  That means that the difference between buying gold at $850 or $950 is not a big enough deal to stay completely out of it now.  We would LIKE to be in the 2011 $70 calls for $20.  Sadly, they are $32.25 at the moment.  Here is how you can use a rolling plan to enter something high and still be happy when it's low. 

  • We pick a target amount of gold.  Say 10% of our virtual portfolio and say that's $10,000.
  • We scale in so we buy $2,500 at a time (roughly)
  • We FIRST look at what rolls cost.  The roll from the $120s to the $115s is $1.  Well that's silly, we'd pay that now.  The roll from the $75s to the $70s is $3 so let's say we'll be happy to spend $1.50 a roll.  THEREFORE we buy in at the first strike we CAN'T roll down for $1.50, which is the 2011 $100s at $19. 
  • If we plan on spending $1.50 per $5 roll down as gold falls, it will cost us $9 ($1.50 x 6 rolls) to get down to the 2011 $70s.  That would put us in for $28 total dollar and now the question is – is it worth giving up $30 in position advantage over our potential callers in order to save $4.25?  No, not really.  The delta on the $100s is .51 and the delta on the $70s is .83 so that $4.25 blown as soon as gold moves up $13.

OK then – back to scratch and we'll look at this again.

  • As we are short-term bearish we'll work backwards from a bearish cover, the Apr $92s for $4.60.
  • So, where does a $92 caller give us the best roll for $4.60 in a position we can live with if gold instead takes off? 
  • Looking over a bunch of strikes, I can live with the Sept $85s at $14.75. 
  • That puts us in a $7 spread for $10.15 and we can allocate 2 contacts ($2,030) for the first round.  That way, if gold goes up $100 by  Apr 17th, we can expect the calls to be $21.40 (the price of the Sept $75s) while we would owe the $92 caller $12.  At that point, we would be able to buy 2 more long calls (probably the Sept $95s for $14ish) and roll the callers to 4 more long calls at $4.50.  The cost of that round would be another $2,030 (about) for the calls and $600 to make up the difference in the roll of the callers.  If gold goes up another $100, we can do that again one more time before we're fully invested. 

Of course we will hopefully not just sit there and let this happen to us like dumb bunnies but it gives us levels to watch and an upside plan.

On the downside, the $4.60 we sold SHOULD give us a roll of 10 strikes.  You calculate this by going $4.60 LOWER in price on the same month as it gives you a better idea of where the spread would be if gold drops (but the VIX may go up and change the deltas).  That means we are pretty much protected against a $100 drop in gold between now and Apri 17th and, since $850 is our downside target, we can live with that and will be happy to roll down and buy another round at that price or lower if we need to. 

So this plan commits just $2,030 out of $10K to a downside that we think may chop our 2 Sept $85 calls down to $10.10 (even) and commits us to a strategy of being in for $4,660 if gold goes up $100 with 2 Sept $85 calls that SHOULD be worth about what the $75 calls are now ($21.40) and 2 Sept $95 calls at the $14.75 the Sept $85 calls are fetching now.  That's $7,230 worth of contracts at $85 and $95 covered by 4 May $102s.  Since our net spread is $17 on one set and $7 on the other, it means we would have $4,800 of intrinsic value to our callers for $4,660 if all goes according to plan. 

That may not sound tremendous to you after a month's work but the key is to mitigate the entry risk as we have eliminated most of our long premium of the first round and have great upside leverage while staying about 38% covered overall (average $12 intrinsic value covered by $4.60 callers).  Once you have 4 longs and 4 callers, you can then apply simple stops to the new callers (1/4 off at 25%, 1/4 off at 50% gains) and you give yourself plenty of room to run

This is a BEARISH entry to gold because we THINK it's going down, not up, but we don't want to miss a rally just in case.  So our plan is to at least make sure we can establish a position that is well in the money and we will still have half our firepower ready to jump on the momentum train (against short calls that are already covering our original position) if things do take.  Ideally though, we are patiently waiting for a better exit and picking up some caller income while we wait.   Keep in mind that Wednesday's gold move was VIOLENT, dropping down to $87 from $90 before flying up to $94.   Of course, if you were covered and rolled down your longs for $1.50 and then stopped out 1/4 of your callers when they gained 25% off the bottom, you would have been thrilled right? 

Keep in mind this is disaster protection, not a trade we really WANT to win as it means inflation is out of control and our currency is collapsing but holding, ultimately, $10,000 worth of GLD under $100 if gold goes to $2,000 (GLD $200) would be $40,000+ on 4 contracts.  That can offset a lot of inflation! 

Remind me to update this trade as we move forward, it would be good to keep trade comments under this post so we can see how it pans out over time! 

Another way to play gold more aggressively is to use the UGL Ultra Long Gold ETF at $35.80.  Realistically, this should only gain $17.90 ($53.70) if gold goes to $1,200 but, if gold drops to $750, this ETF should lose about 40% ($14.32) to drop to $21.48.

Here's a fun way to get some free downside protection against a longer positon:  You can sell the Oct $48 calls for $4.45 and you can sell the Oct $30 puts for $5.75 and you can buy the Oct $41 puts for $11.30 (net $1.10).  That means that, for net $1.10, if gold falls 20% you can expect to collect you vertical put spread of $11, + $9.90.  The only way you lose is if GLL goes above $40 (forgetting the dime) and you don't lose more than $1 until GLL crosses $48, up 35%, which would be a 17% gain in gold to $1,110.

Now we can look back at GLD and see if that helps us.  We plan on buying the Sept $85 calls for $14.75 so at $100 we are fully in the money and gaining dollar for dollar.  If GLD goes to $111, then these calls will be at least $26 BEFORE we have to worry about paying back the GLL caller.  We also know that these ETFs don't work all that well and that it is unlikely GLL will get the full benefit of gold's rise – good to keep in mind but not something we should base our math on.  So is it better to use these puts as cover rather than the GLD callers? 

Since it pays twice as much as the GLD callers ($4.60) on a 20% drop, they do make a better safety net and the upside risk isn't partciularly worse since a 20% gain would put our $92 callers $9 in the money so it is more limiting to our upside by a long-shot.  The reasons they are not my first choice as a cover are margin and confusion.  You may have serious margin issues selling naked calls but, if you can do this and manage the stops, it's worth the hassle of tracking another position.

So lets call that a play:

Buy 4 GLD SEP 2009 85 Call (.GLDIG) $14.75 $5,900.00
Sell -2 GLD APR 2009 92 Call (.GLDDN) $4.60 ($920.00)

Net cost $4,980, no margin.  At $117 this trade profits $3,304 so no problem offsetting what we may owe the UGL caller, even if we do get blown out.  If UGL doubled to $70, we would owe 2 x $22 to the $48 callers or $4,400 but a 50% gain in GLD to $140 would give us 2 x 55 on our $85 calls ($11,000) of naked upside so no issue there. 

Of course, if GLD falls below $90, we can cover with $90 calls and set a 25% trailing stop on 1 of the $90 callers and one of the $92 callers immediately, recovering any time we fall below $90. 

Buy 2 UGL OCT 2009 41 Put (.ULFVO) $11.30 $2,260.00
Sell -2 UGL OCT 2009 30 Put (.UGLVD) $5.75 ($1,150.00)
Sell -2 UGL OCT 2009 48 Call (.ULFJV) $4.45 ($890.00)

Net cost $220, probably $1,780 margin requirement to provide $1,980 in additional downside protection.  Be very aware that is you end up paying .50 more for your net entry, you are giving up $100 in downside protection.  As these options are more thinly traded, you may want to fill them first. 

As time goes on we'll compare the simple play to the more complex one and see which fares better.



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A question on the GOOG double diagonals we were discussing on Friday: Specifically, if GOOG increased $50 in a day, you said it would be a no-lose proposition to roll your long puts up to $470 from $450 for $14 in premium.
The original spread in your example was a $250/450 spread for $36 in premium. The new spread is $250/470 for a net $30 in premium, hence the premium reduction you mentioned.
But this doesn’t strike me as "no lose." If you compare graphs of the two spreads at expiration (Jan 2010), the original spread does better from about $456 and higher and worse lower, while the stock has moved from $330 to $380. You do better when the stock has moved "outside" (higher than put strike, lower than call strike) of your spread strikes at expiration. So the original spread performs better on the upside, because it a lower put strike.  So, I don’t see increasing the distance between the strikes as no lose. What am I missing?

Phil, above in the post, when you say:
"THEREFORE we buy in at the first strike we CAN’T roll down for $1.50, which is the 2011 $100s at $19. If we plan on spending $1.50 per $5 roll down as gold falls, it will cost us $9 ($1.50 x 6 rolls) to get down to the 2011 $70s.  That would put us in for $27 total"
shouldn’t that be "That would put us in for $28 total" ($19 + 9)?

 Why the expectation that gold may be short term bearish?
With the Fed monitizing debt, the Europeans refusing to stimulate and average people all over the world looking to gold as a hedge against currency devaluation, what would be the overwhelming force that is going to drive down gold?
I think your current comment to play gold is very helpful. I hope you do keep this one running as an updated comment thread so everyone can monitor how the spread plays out.

Good Morning Phil & all

Asia Markets :    Monday, March 23, 2009
(The following is from WSJ; please cross check with other sources to confirm.)   

Nikkei Average*                              8215.53    269.57    3.39%
Hang Seng*                                  13447.42    613.91    4.78%
China: DJ Shanghai*                       267.66        6.29    2.41%
Seoul Composite*                         1199.50      28.56    2.44%
Bombay Sensex                             9424.02    457.34    5.10%
Baltic Dry Index                               1782.00     -13.00   -0.73%

*at Close

Details of the Toxix Asset Plan
The Treasury’s complex plan to use private funds to purchase toxic assets uses low-cost government financing, government guarantees and government equity as incentives, people familiar with the matter say.
There are two parts to the plan — one to purchase securities, the other to purchase loans from banks, using a combined $75 to $100 billion of funds from the Troubled Asset Relief Program.
These people say the plan will begin with $500 billion, roughly divided between the two different parts, but officials hope to be flexible and adjust the size as markets develop. Taxpayers are potentially on the hook for hundreds of billions of dollars, but officials stress they have built in protections.

Ooops – I spelt Toxic incorrectly in the earlier post.

Asian Stocks at Two-Month High US Debt Plan

Asian stocks rose to a two-month high Monday and high-yielding currencies advanced on the yen after details on a U.S. plan to rid banks of up to $1 trillion of toxic assets improved confidence about risk taking. The White House said it would put in as much as $100 billion into a bailout fund and give attractive financing to private investors to buy highly illiquid assets from banks, sending dealers diving back into equities and selling safe havens such as gold and U.S. Treasurys.

Hopes for the U.S. plan boosted U.S. stock futures by more than 1 percent. Already BlackRock, the largest U.S. publicly traded asset manager, said it would take part in the plan, relieving some uncertainty as to how much private participation there would be.

Japan’s Nikkei closed 3.4 percent to post its highest close in seven weeks, with banks jumping 4.7 percent on optimism about U.S. plans to further help a strained financial system.

South Korea’s KOSPI finished 2.4 percent higher, led by financials on U.S. bank plan expectations, while gains by technology issues  lent further support.

Australian shares closed 2.4 percent higher, lifted by banks and miners, on hopes the Obama administration’s plan to cleanse banks of up to $1 trillion in bad assets would get credit flowing and revive the U.S. economy. Gains were powered by the top banks, which surged after details of the U.S. toxic assets plan came out.

Hong Kong shares rose 4.8 percent to a five-week high, but HSBC made only modest gains as its rights began trading.

Singapore’s Straits Times Index extended gains, up 4.2 percent. Most blue chips were in positive territory.

China’s main stock index jumped 2 percent to a one-month high in heavy trade, led by property, non-ferrous metals and financial shares on signs that China may pursue additional stimulus spending. The official China Securities Journal quoted Finance Ministry researcher Jia Kang as saying that China was preparing a new round of stimulus spending in case second-quarter data indicated such spending would be required.

Bombay Stock Exchange’s Sensex ended at 9453.19, up 486.51 points or 5.43 per cent. Indian markets rallied Monday to end sharply higher after sentiments in global markets turned bullish ahead of US Federal Reserve’s s move to bail out banking sector from toxic bad assets. Banks, oil&gas and metals led the rally while realty space ended with modest gains.

Banks Lead Euro Stocks Higher

European shares rose for a third straight session on Monday, with financials the major gainers as investors trained their sights on a U.S. Treasury plan to buy toxic assets from banks.

The pan-European FTSEurofirst 300 index of top shares was up 1.6 percent at 729.02 points. However, the FTSEurofirst 300 index is still down around 12 percent for the year.

Bank stocks were higher. Barclays gained over 9 percent after private equity group Hellman & Friedman, Bain Capital and TPG showed interest in buying its iShares business. Credit Suisse, Societe Generale, Banco Santander, BNP Paribas and UniCredit were up 1.9 percent to 5.5 percent.

Daimler rose 6.1 percent after Abu Dhabi government-linked Aabar Investment completed a $1.82 billion capital hike on Monday after taking a 9.1 percent stake in the group to become the top stakeholder in the German carmaker.

Energy stocks also gained as crude jumped 1.5 percent. BG Group, BP, Royal Dutch Shell and Total were up 0.8 percent to 2.3 percent.

Miners were higher as copper rose 3 percent. Rio Tinto was up 5 percent as the Daily Mail said the group is preparing to hand unprecedented boardroom power to its Chinese backer. Xstrata was 0.7 percent higher after the Wall Street Journal said acquisition opportunities are developing in the mining sector, with share prices weak and some companies being forced to sell assets.

A few sectors were in the red, with defensive drugmakers lower as investors switched into cyclical stocks. Novartis, Sanofi Aventis and AstraZeneca were down 0.3 percent to 0.5 percent.

Later investors will eye U.S. existing home sales for February with economists in a Reuters poll expecting sales to come in at an annual rate of $4.45 million, down from $4.49 million in January.

Across Europe, the FTSE 100 index was up 2 percent, Germany’s DAX was 1.8 percent higher and France’s CAC 40 was up 1.3 percent.

Dollar Falls as Toxic Asset Plan Boosts Sentiment

The dollar continued to sag on Monday as risk appetite improved on a U.S. plan to remove toxic assets from bank balance sheets after details of the scheme were revealed.

The dollar fell against a basket of currencies to 83.3, with investors continuing to favor currencies whose central banks had interest rates above zero and look unlikely use quantitative easing to get their economies moving, such as the euro, Australian dollar and Norwegian crown. However, the pound also got a lift early on Monday due to the dollar’s broader weakness. The yen also slipped, falling to its lowest in five months versus the euro, and dropping more than 1 percent against higher-yielding currencies.

The euro [ 1.3658    0.0078  (+0.57%)   ] rose against the dollar, after hitting a 2-1/2 month high at $1.3739 on EBS last week, while the pound [1.4585    0.0126  (+0.87%)   ] also gained versus the greenback. The Aussie dollar [ 0.6989    0.0117  (+1.7%)   ] was the biggest gainer against the U.S. currency, having hit a 2-1/2 month high of $0.7003.. The dollar [ 96.35    0.42  (+0.44%)    ] firmed against the yen, but was still well down from a four-month high of 99.69 hit earlier in March. It dropped to a one-month low of 93.55 last week.
Against the yen, the euro [ 131.63    1.32  (+1.01%)    ] rose. Earlier, it hit its highest since late October at 131.99 yen. The yen’s broad slide lifted the Australian dollar [  67.37    1.43  (+2.17%)   ] to a 2-1/2 month high at 67.29 yen and the New Zealand dollar [  54.68    1.09  (+2.03%)   ] up a similar amount to 54.51 yen, having also hit 2-1/2 months highs earlier.

European Central Bank chief Jean-Claude Trichet signaled that the central bank remained wary of interest rates falling to zero in a newspaper interview published on Monday, in contrast with the U.S. and Japan, where rates are already almost zero.

The Fed’s move into QE is targeted at lowering all rates to avert deflation and stimulate the economy. It is also aimed at making it less profitable to hold cash and Treasuries, pressuring investors to put money into riskier but higher-yielding assets such as corporate bonds.

The U.S. Treasury will auction close to $100 billion of new Treasuries this week.

Oil Rises Toward $53, Weak Dollar Supports

Oil rose towards $53 a barrel on Monday to the highest in almost four months, supported by a weak dollar, after the United States gave details on its plan to remove toxic assets from bank balance sheets. The U.S. government fleshed out the plan on Monday which it hopes can purge banks of up to $1 trillion in toxic assets, a key element of its drive to pull the world’s biggest economy out of a deep recession.

U.S. light crude [ 52.63    0.56  (+1.08%)] for May delivery rose, having earlier climbed to $52.90, the highest price since Dec. 1.
London Brent crude [ 51.7    0.48  (+0.94%)] traded higher.

In a further sign of weakening demand, crude imports into China, the world’s No. 2 oil consumer, fell 18 percent from a year ago in February, customs data showed. Oil workers at Brazilian energy firm Petrobas began a five-day strike on Sunday in a bid to cut crude output in protest over job cuts, pay and conditions, a union leader said.

Oil has climbed from below $33 reached last December, lifted also by supply cuts by the OPEC. Some analysts say a prolonged rally will depend on a boost in demand for fuel.

Gold edges up on record ETF holdings, dollar fall

Gold was trading at $955.50 an ounce at 0559 GMT, up 0.5 percent from New York’s notional close of $950.90 on Friday, when it rose as high as $966.70, its highest level since February 25.

The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings hit a record 1,114.60 tonnes as of March 20, up 11.31 tonnes or 1 percent from the previous day. Buying of gold by ETFs, which back the securities they issue with physical stocks of bullion, has picked up pace since the U.S. Federal Reserve announced plans to buy $300 billion in longer-dated Treasuries on Wednesday, spurring inflation concerns. SPDR alone has added 45.55 tonnes of gold to its reserves since Wednesday

Among other precious metals, platinum fell to $1,107.50 an ounce in a retreat from a near six-month high of $1,127.50 on Friday.

But platinum, chiefly an industrial commodity, pared earlier losses on speculative buying in the wake of Monday’s rally in non-ferrous metal prices on growing optimism about global demand, traders said.

Just my feeling, Gold is going up for another two years atleast. 🙂

 Anyone known when /TF starts trading?

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