Wednesday, March 23, 2011

Gold Hits New High - Playing with the house's money now!

Gold hit a record high Thursday. Given that the last month has included: the US government operating from week to week, riots, dictators overthrown, war, earthquakes, tsunamis, and nuclear meltdowns it is kind of surprising gold has not moved more.

Still, this trade established six weeks ago is progressing well. As GDX neared $60 and the short options went under $2 we covered the GDX short put portion of the position. That means
1). Any risk related to a drop below $56 for GDX and being forced to buy it has been removed. No risk capital is now committed to this trade.
2). $800 per lot in cash was originally generating by putting on this short position. $400 was used at the time of the initial trade to buy GLD Jun $137 calls, and the other $400 was used to buy back the position today. i.e. No cash out of pocket has been spent so worse case...break even.
3). As of Friday morning the Jun $137 GLD call was worth $6.40. So the total trade could be cashed in for nearly a 6% gain now. However, given that it appears as if gold could be breaking out, international tensions remain high, and we are playing with the house's money we will leave this trade run for awhile.

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