A Speculative Options Positon in Japan (EWJ)

Japan and their new aggressive monetary policy has been in the news recently. Let me be clear that CCI is not a currency expert or trader, and also is not bullish on Japan over the longer term.  However, common sense seems to indicate that a dramatic change in their monetary policy might create some speculative trading opportunities around the Japanese market.

CCI has most often seen the Wisdom Tree Japanese Hedged Equity ETF (dxj) as the recommended way to play this macro development. That made sense to me, and in full disclosure, I established a position in this etf in my core account awhile ago. It has indeed performed nicely.  It might have some more room to move, but I'll be inclined to take profits if  that trades gets too much more publicity and/or moves too much higher. I'd also expect the Bank of Japan to get international pressure to move slower, and hence the hedging aspect of this etf might become less useful in the future.

However, CCI was also looking for a more speculative way to have some leveraged exposure to the market in Japan in the event it continues to pop.   The following position was established over the course of this week.  Unfortunately, current conditions may not allow readers to establish a similar position, but hopefully it provides the reader some food for thought and/or awareness to consider establishing this type of  position if opportunity does represent itself.

Early in the week with the ishares Japan index (ewj) had a sell off and was trading around $10.50.  At that time, CCI sold the Jan 14 $10 put and bought the Jan 14 $11 call.  This was established for a modest $.09 credit/contract.   This risk reversal position was essentially a synthetic long position in the stock with a slight reduction in total risk capital and even less buying power consumed.  Fortunately, later in the week based on the actions of the Bank of Japan  EWJ jumped to near $11.  At that time CCI spread off both sides of the position by buying the Jan 14 $9 put and selling the Jan 14 $13 call for a $.04/contract debit. 

This leaves CCI with very little capital at risk, and a 2:1 speculative profit potential based on a significant move in  EWJ's price by the end of the year. (all gain/loss are per/contract)

• $8   (down about 27%) - lose $100
• $9   (down about 19%) - lose $100
• $10 (down about 9%) - make $5
• $11 (flat) - make $5
• $12 (up about 9%) - make $100
• $13 (up about 18%) - make $200
• $14 (up about 27%) - make $200

Now it is time to sit tight for awhile, and see how this settles out after the news cycle moves on.

Rolling Options in Gold at a Loss

As last discussed here,  CCI continues to get portfolio exposure to gold via holding options in the gold etf (GLD) and funding that purchase via selling puts in the gold miners etf (GDX).

 Since CCI views gold as primary a hedge against a down market, and the market has pretty much been going straight up this year,  a drop in gold should be expected and.... it has indeed dropped!     With only three days until expiration, CCI rolled the short put position in GDX from the Mar. $45 strike to Apr. and all the way down to the $36 strike.  The proceeds from the sale of these puts was used to buy an Apr$156 call in GLD.

The March GDX option lost a whopping 15.3% of the cash secured value. That is about twice the drop of just holding gold. Hence, this strategy has not met its objective of losing less than gold when the price falls.  This discrepancy is because the gold miner stocks have gone down a lot more than gold .  Hopefully the correlation between those entities will revert to its mean over a longer time period, and the portfolio will recoup that underperformance at that time.

   CCI continues to pursue this approach and current holdings are:

• Short 3 Apr $36 GDX puts for every 1 long Apr $156 call. 
  
• Short 3 June $39 GDX puts for every 1 long Jun $162 call.

GDX and GLD closed the trading day at day trading at $36.92 and $153.71 respectively. 

Rolled Gold Miner Puts to June

As last discussed here  CCI continues to get portfolio exposure to gold via holding options in the gold etf (GLD) and funding that via selling puts in the gold miners etf (GDX).

Gold has continued to trade down/flat and with low volatility.   With ony two days until expiration, CCI rolled the short put position in GDX from the Feb. $44 strike all the way out to the Jun $39 strike. The closure of the Feb $44 put essentially closed the February cycle for this approach at a 4.8% loss.  On a relative basis that was worse than the 1.1 6% loss for the gold etf over the same period.  At the same time, the proceeds of the GDX Jun $39 puts were used to obtain a GLD $162 Jun. Call

One of the goals of this approach is to  "Lose less if gold does not spike".  So this approach failed to achieve this objective this cycle.  That is because the correlation between gold and the miners has broken down over the past month.  Hopefully, that correlation will revert to the mean in the near term, and this will continue to balance itself over time.   More generally, it is important to remember that a holding in gold is primarily intended to be a hedge against a global macro event that would like adversely impact the equity market.  Fortunately, that has not happened and that means the vast majority of the portfolio is up over the past months.  Hence, this loss can be "rationalized" as a cost of hedging

Enough of the "rationalizations".  CCI continues to pursue this approach and current holdings are:

• Short 3 March $45 GDX puts for every 1 long March $170 call. 
  
• Short 3 June $39 GDX puts for every 1 long Jun $162 call.
• Long Feb $162 call which is assumed will expire worthless on Friday.

Both GDX and GLD drifted up after the transaction and are closed the day trading at $41.28 and $159.02 respectively. 

Rolled short put in gold miners

As last discussed here  CCI continues to get portfolio exposure to gold via holding options in the gold etf (GLD) and funding that via selling puts in the gold miners etf (GDX).

Gold has trade down beginning of the year.  With a small bounce back this week, CCI rolled the short put position in GDX from the Jan. $47 strike to the Feb $44 strike. The closure of the Jan $47 put essentially closed the January cycle for this approach at a 3.9% loss.  On a relative basis that was better than 6% loss for the gold etf over the same period.  That of course is one of the goals of this approach. "Lose less if gold does not spike"

At the same time, the proceeds of the GDX Feb $44 puts were used to obtain a GLD $162 Feb. Call

Specific holdings as of now are:

• Short 3 March $45 GDX puts for every 1 long March $170 call
  
• Short 3 Feb $44 GDX puts for every 1 long Feb $162 call
• Long Jan $175 call which is assumed will expire worthless on Friday.

Both GDX and GLD drifted up after the transaction and are closed the day trading at $45.59 and $162.59 respectively. 

2012 Results for "GRR"- Double the gold market ...again

As discussed in the past, CCI continues to get the gold allocation of an overall portfolio from owning calls in the gold etf (gld) that are funded but the sale of puts in the gold miners ETF (gdx). The rationale for this strategy was originally discussed here, and has been followed under the gold risk reversal (grr) tab in this blog.  The primary objective of this approach is to profit from any relatively rapid rises in the price of gold due to some macro level event, while trying to minimize the capital required and risk of having this exposure.

Year end seems like an appropriate time to summarize performance of this approach. Long time readers will recall that this approach was first started on Feb 4 of 2011. For the 11 months of that year a handful of these type of trades were successfully made. The performance for 2/4/11 to 12/31/11 was

• CCI gold risk reversal approach (GRR) – 36.2%
• Buy and Hold of Gold over the same time period – 15.5%
• Buy and Trade Gold with the same timing as GRR – 25.7%

CCI took a small portion of the gains off the table at the end of last year, and executed the same process more consistently in 2012. The performance for 2012

• CCI gold risk reversal approach (GRR) – 11.0%

• Buy and Hold of Gold over the same time period – 6.6%

Yes, that is two years in a row of approximately doubling the returns on gold! Further, this return is calculated assuming the puts in gdx are cash secured. The returns on the just the capital required to hold the puts would be 3 to 4 times greater! Of course loses would also be magnified in a similar manner if calculated in this manner.

Encouraged by these results and feeling gold might be poised for another spike in price as Washington DC entered the post-election/cliff/ceiling period,  CCI doubled the portfolio's allocation to gold(discussed here). The timing of this decision was not too good...yet. Performance for 11/7/12 to 12/31/12

• CCI gold risk reversal approach (GRR) – (-2.5%)
• Buy and Hold of Gold over the same time period – (-2.4%)

Obviously past results are not a indication of future results. Gold has been down in the first few trading days of 2013. That means very early results  for 2013will be negative on this approach. It also means the time to adjust these positions might be approaching. Specific holdings as of now are:

• Short 3 March $45 GDX puts for every 1 long March $170 call
  
• Short 3 January $47 GDX puts for every 1 long January $175 call
  

FYI, 1/9 closing prices was $44.35 for GDX and $160.50 for GLD

Adding Exposure to Gold

As recently discussed here  CCI has decided to take the overall portfolio's position in gold from what most experts would consider underweight to neutral. Further, long time readers will know that CCI likes to gain portfolio exposure to gold via options.  Specifically, selling puts in the gold miners (GDX) and buying calls in the gold etf (GLD).  The objective of this approach is to gain exposure to any potential spike in gold while reducing the amount of capital consumed.

Along those lines, last week CCI was able to

• Sell to Open - Three March $45 GDX puts for $574.69
• Buy to Open - One March $170 GLD calls for $478.73

Summarizing recent activity the portfolio contains the following positions that were established for zero out of pocket costs.

• Short 3 March $45 GDX puts
• Short 3 January $47 GDX puts

• Long 1 March $170 GLD call
• Long 1 January $175 GLD call
• Long 1 December $165 GLD call

As of this morning GDX was trading around $49,  and GLD was trading around $167.

• In the unlikely event that these entities continue to trade near these levels the portfolio for the next few months will break even 
• If the gold minders fall 5-10% ( i.e. below $47 or $45) the portfolio will start to lose money on the GDX options.
• If gold increases at all from here the portfolio will start to register gains on the gld options.  If that does start to occur, CCI will look to take off the risk related to the GDX options and harvest gains in the GLD options.

CCI Back from the Hamptons ...Buying Gold Options

CCI is back after a summer time break from the "pressures" of blogging.
Spent spent some time in the Hamptons......Not those Hamptons...
But rather .....The Hampton Inn off the interstate..lol

One of the decisions CCI made over the last month was to increase the exposure of the overall portfolio to gold.  This does not mean I'm a gold bug.  However, I do concur with most experts that at least a  few percent of exposure to gold might provide some non-correlated protection for a portfolio in the case of some unusual market activity.    The main rational for acting now is a series of macro level risks bubbling around  such as increased tension in the mid-east, central banks around the world making all kind of announcements that seem inflationary over time, US elections and related "fiscal cliff",  potential seasonal demand in Asia, etc.   A miss-step in any of these areas could send gold spiking higher.

 Over the past months the portfolio had a very, very small exposure to gold.  So I guess you could say CCI is going from "underweight" to "neutral" on gold.
 
As discussed in the past, CCI feels using option in GLD and GDX  is a cost and capital  effective way to get exposure to gold.  This article at Seeking Alpha describes the recent trades and rationale for going long options in GLD and GDX.     As before, this consists of selling puts on GDX to buy calls on GLD.

Stay tuned for more updates on the portfolio's gold position.

Rolling Gold and Gold Miner Option Position

As discussed here , CCI had established the following option position in the gold miners and gold etfs last February. 
 "Sold 2 June $52 GDX puts and bought 1 June $175 call.  That trade was done for a net credit of $86. As before we will hope to manage our way out of the risk of being short the GDX puts while using the GLD calls to profit from any wacky spike in the price of gold. "

Since the time of that trade the price of gold has fallen and the value of gold miners stocks has fallen further.   Hence this trade has been a loser and was closed on Wednesday for a loss of $1,551/contract.  That is not surprising as results of this position are anticipated to be highly correlated with the price of gold.

Of course no one likes to see a losing trade, but this is the fifth time this same type of trade has been completed and only the first time it has been a loser.  Cumulatively these 5 option trades are up  41% as compared to buying and holding of gold (gld) over the same time period would have returned 29%.

CCI remains somewhat unexcited about the prospects for gold, but feels from a diversification perspective it still makes sense to have some exposure to gold in a portfolio.  I continue to feel this type of paired option trade provides a better leveraged, lower cost way of gaining that exposure for the portfolio than simply buying the etfs. Hence this trade was re-established in September options.  Specifically, on Wednesday CCI

• bought 1 (GLD) Sept $155 call, (with GLD trading at about $151)
• sold 3 (GDX) Sept $39 puts (with GDX trading around $44)
• these trades were done for a collective net $31 credit
• this trade conceptually puts at risk $11,669 for the  potential purchase GDX. (actually less capital is actually tied up due to option margin rules). This trade starts to lose money if GDX falls by more than 10% this summer. The trade starts to gain from anything over about a 3% gain in gold this summer and is position to have unlimited, leveraged gains if for some macro level reason the price of gold spikes this summer.
  

Closed a Gold Position

With GLD trading over $173 and near its last high (in Nov of $175) CCI sold the March $155 call in the portfolio today.

This completes the fourth round trip for this trading strategy for holding gold. As shown in this google doc,  this round trip had a robust 19% gain, to bring the total gain for this strategy to 56%.  Gold is up "only" 32% during this same period.

CCI remains long gold via the Jun $175 calls.  If gold pulls back we will consider adding to the position in some manner.

Adding to the 50% Gain in Gold Options!

CCI continues to want to have some small exposure to gold primarily for "insurance" against some wacky market move.  As discussed several times in  posts like this CCI is getting this exposure via options.  This approach attempts to capitalize on the high correlation, but volatility differences in the gold miners etf (GDX )and gold etf (GLD ).   A trade history for this strategy can be found in this google doc. 

Please note that since these trades were started about a year ago they have gained 50.3%!!!!
Gold is "only" up 26.8% in the same time.  Clearly the leverage has worked in our favor!  What is potentially more important is that less capital was at risk, and if/when the gold market moves against us this approach seems like it should lose less than just holding gold.   Hence, CCI plans to continue using this approach.


With gold slumping this week, a few trades were made::

- Closed the Mar $62 covered calls in GDX.   The portfolio is still long the Mar $155 calls in GLD.  The profits on the GDX options have more than covered the cost of this GLD option.  It is in the money now, but we are going to let it ride for awhile longer.

- Sold 2 June $52 GDX puts and bought 1 June $175 call.  That trade was done for a net credit of $86. As before we will hope to manage our way out of the risk of being short the GDX puts while using the GLD calls to profit from any wacky spike in the price of gold.   Worse case, on a pull back in gold, the portfolio will become long 200 shares of GDX at a price of $51.57.  

Locking in Profits in Gold.

As previously posted  here , CCI  established an option position to provide the potential leveraged upside in gold (GLD)  and the gold minors (GDX) in late December.   Since that time gold has gone up  over 10%.  CCI locked some profits in on this position on Friday.  Specifically, CCI cover the 2 Mar $50 GDX short puts and sold 2 Mar $62 GDX calls against the portfolio's GDX position.  This was done for an inconsequential credit of $.014/share. 

More important than the small credits received to establish this position is that this action removed any risk of a pull-back in the price of gold.  (i.e. this trade can now not lose). It also  kept the long $155 March option in gold intact.   This option has increased in value by $9.30.  That is an approximate 14% gain against the total risk capital on the original trade.   Since we are playing with the houses money, we will leave this option open for awhile longer.  It provides a  small open-ended insurance policy against something crazy happening in the world that causes gold to rise rapidly.

Fortunately this same type of trade has now worked four times in a row. As the trade continues to move toward its March expiration, CCI will be looking for the opportunity to put this this type of trade on again in further out months.

Gold - Continuing to Use Options on GDX and GLD

As discussed in this article written over a year ago CCI described an approach to provide upside exposure to gold in a portfolio while minimizing the risk capital and out of pocket cash by selling put options in GDX and buying call options in GLD.

Over the past month, gold has fallen about 10%, and CCI closed out the latest version of this trade this month.  Earlier in the month the GDX Jan $65 puts were covered when gold was trading much higher for a $3.62/share gain. Today the GLD Jan $180 calls were covered for a loss of $5.29. A net loss of $1.67/share or 1.28%.  Not great, but not too bad considering the plunge in gold prices.

This type of trade was done three time in 2011.  Details of the trade for 1 lot can be found at this google doc. In total these three trades yielded 36.17%.  That compares to a gain of 24.94% if gold was held for the same time periods during the year, or about 9% if held from Jan 1 to now. 

For 2012 the concept of the portfolio having some exposure to gold to provided some "insurance" in the event of some macro level issue causes a discontinuity in the market remains appealing to CCI.  The option volatility and correlation between GLD and GDX remains similar as described in previous posts.   Hence CCI plans to continue to using this trade architecture.  Specifically today CCI

• Sold 2 Mar $50 puts in GDX for a net credit of $620
• Bought 1 Mar $155 call in GLD for a net debit of $532

A net credit of $88 or an insignificant 8.8 cents per share.   However, that means there is no out of pocket cost for getting exposure to gold in the portfolio, and reduced risk capital ($10k/lot) as compared to owning GLD.  CCI plans to sit on this position until some global macro event causes the gold bugs to push up the price at which time we will look to take profits.  If nothing drives the gold price upward by March it is probable the portfolio will be the proud new owner of gold miners shares at $50/share.  A position, that I'm comfortable taking on.

Using options to increase returns if gold were to move up

Readers will recall that CCI has maintained a small overall exposure to gold in the portfolio.   At present, this exposure is represented by a  position in the gold miners etf (GDX).  This was last discussed  here.
Also in the past CCI has successfully found ways to take advantage of the high correlation, but different implied volatility in option prices between the gold miners etf (gdx) and gold etf  (gld) to improve returns.   A good example of this concept was initially described in this article


With European news continuing to swirl, the US debt committee coming towards their due date, mideast uncertainty continuing, and gold prices seemingly consolidated CCI wanted to increase exposure to the gold market.  As in the past, CCI has deployed an options strategy to try to increase returns in gold rises without taking on much more risk if the price of gold were to fall.  This strategy can a get a little bit complicated,  but is described in detail at this new article. 

In summary, the strategy is to sell $65 Jan covered calls against one lot of the gdx shares owned and use these proceeds to buy one lot of $180 Jan calls in the gld etf.   As discussed in the article this strategy will provide increased leverage and hence returns without increasing the risk of the portfolio.

Taking Profits in Gold

CCI decided today was the day to take profits in the gold options trade that was in play.

To refresh the reader's memory, CCI sold Sept $57 puts in the gold miners etf (GDX) and bought Sept $148 gold options (GLD) in mid April  for a small net credit.  Unwound both positions for a net gain of 29.1% on risk capital.  Obviously this worked very well as a hedge against the rest of the stock portfolio.  This small amount of leverage, and large move in the price means that this option play (essentially a risk reversal) actually outperformed a more simple purchase of GLD, which was up  27.9% during the same period.   (google doc of transaction data can be found here) More importantly, this option trade would have likely lost less if our timing was bad and gold had dropped over this period. 



It is never easy to fight the greedy desire to keep this trade running.  That seems particularly challenging with gold which really has no fundamental metrics (i.e. earnings, revenue, etc) upon which to determine a fair value, and hence decisions seem even more emotional. No one really knows where gold will go from here, but CCI decided now was the time to take profits for several reasons including:

• Gold seems like its momentum is never ending.  Using the "law of round numbers"  (lol) $2000/oz could be in the cards.  That is well less than 10% up from here.   However, the move has been so parabolic it just seems like if the big money exits this trade it could loose a lot more than 10% very quickly.
• These options expired in Sept. While that is still 4 weeks away, some action would have to be taken soon.  So why not now. To me that is one of the advantages of options...it forces an investor to make proactive decisions  vs. falling into passivity. 
• Option volatility is high and hence now is an advantageous time to sell.
• This rapid move in gold does not seem healthy, and hence some "entity" might want to slow the momentum down.  For example: Some government deciding to sell a lot of its gold, or more likely exchanges raising margin requirements. 
• Alternative uses for this capital in the stock market is more compelling than it was a month ago.

So, we are out of this trade, but still hold some shares in the gold miners(etf) to represent gold in the overall portfolio.  If gold does pull back, we will likely reestablish a position in gold , possibly via options.

GDX and GLD - A bet on reversion to the mean

CCI has previously described an options strategy around the gold ETF (GLD) and the gold miners (GDX).

A key to that strategy was the assumption that since these two entities have traded with high correlation in the past they would continue to do that in the future.   Take a look at the recent chart below.

Two year chart of GLD vs GDX

Surprise, surprise....over about the past 2-3 months gold has been relatively flat and the gold miners have lost nearly 20%.   Hmmm.  That could mean
a). something is causing this correlation to no longer be true (like general stock market concerns)
b). gold is due to fall
c). the miners are oversold and due for a bounce back.

Common sense would seem to dictate the miners would follow the price of gold so CCI chooses "c". On Friday bought a lot of GDX just over $52.50. 

Hopefully earning season will bolster the confidence in these stocks.  We will be watching the relationship on  this chart hoping to see the pattern "revert to the mean" and GDX get a nice bounce over the coming months.

Rolled Gold Option Positions Out and Up

With gold bumping along near its all time high, and time decay starting to more rapidly erode the value of the portfolio's option position.... the original position was closed. Further, the initial trade concept was rolled out and up to the September time frame. Details below:

Specifics of the trade can be tracked at the spreadsheet below. In summary

• The GLD June $137 call was closed at $7.71. The first full cycle of this position generated a 7.3% return in about 2 1/2 months.
• Sold two Sept $56 GDX puts and bought 1 GLD $148 call for a net credit of $1.20.

https://spreadsheets.google.com/ccc?key=tBqodgOHC-czdI77ZliAKag#gid=0


In Wall Street complex terminology, this trade would be called some sort of a risk reversal, pairs trade. The more common sense explanation behind this trade can be found in the original post at
http://seekingalpha.com/article/250942-reducing-the-risk-of-gold-exposure-in-a-portfolio-through-options

The new trade follows the same logic in that article just rolled out to September.

* * * * * *

It is also worthwhile to document specific benchmark objectives for this position. Since I view gold as largely an insurance policy/hedge against instability it does not make sense to compare this to a basic benchmark like the S&P 500. Instead, I would define the performance objectives as follows:

• The primary objective of this trade is to make large gains if some power hungry dictator, wild eyed terrorist, bumbling politician, or greedy banker create some black swan event that adversely impacts financial markets. In these cases, I assume gold would increase substantially, and the goal of this trade is to meet or beat the performance of gold. So somewhat arbitrarily if gold increase by more than 10% the goal of this trade is to outperform gold. Let's hope this doesn't happen. If it does there will probably mean bad news in a lot of other ways.
  
• If gold is in some sort of bubble and it pops during the time frame of this trade, the intent of the options spread is to loose less money than holding gold. So again somewhat arbitrarily if gold decrease by 10% or more during this trade the objective is to loose less than a position in gold would have lost.
• If gold trades sideways, arbitrarily less than plus or minus10%, the goal is to manage the options trades to break even. Obviously that would be easier if gold is up a few percent than down a few percent. However, the key point is that unlike other potential option plays to capture an upside in gold, the objective of this structure is to be zero cost if nothing significant happens.
  

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.

Positions - A lower risk position in gold via options

There are many opinions on the direction of the price of gold. Some believe gold is in a bubble and will be below $1000 soon. Others think gold is the only true store of value and will be surging past $1500 in the not too distant future. There is of course no sure way to know which of these scenarios will come to pass. There is however, a lot of solid analysis that indicates having a long gold position in a portfolio is a good diversification strategy. (i.e. hopefully if equities and bonds pull back, gold will not)

If you believe in the positive diversification aspects of having gold in a portfolio, there are a few basic alternatives to gain gold exposure in your portfolio such as buying the Gold ETF (GLD) Gold Miners ETF (GDX). However, options on these equities provide another approach to gaining exposure which might minimize the risk in the event of a fall in the price of gold.

Learn more about a low risk option based approach to getting gold exposure in your portfolio at:

http://seekingalpha.com/article/250942-reducing-the-risk-of-gold-exposure-in-a-portfolio-through-options