Gold has made a successful retest of its low and is in the time band for making a multi-year bottom. We may be in the process of making a major multi-year low here so things may become better in the months to come for long time Gold Bugs. We preach a lot in investing about buy and hold ( and I do believe in this strategy) but if your timeline is not long-term, you could get wiped out when you buy and hold..
Look at Silver for example. It collapsed in April 2011 from $50 an ounce to $30 in 2 weeks. Anyone who was a buy and hold investor who was using margin and trading leveraged products got wiped out. Look at some of the silver miners and where they were trading and where they are trading now. Silver mining companies like (NASDAQ:SSRI) & (NYSE:HL) are trading up to 6 times lower than where they were back in 2011. To any acute investor, if you believe in the silver trade, miners seem to be the place where you will get the most leverage.
(NYSEARCA:UGL) & (NYSEARCA:AGQ) are leveraged products that move twice as much as the underlying Gold and Silver price respectively. Nevertheless, these instruments are not good for long-term buy and hold investors as the decay eats into any potential gains you could make. So what does an investor do when they want to get in on the coming Silver bull and they want some leverage? I recommend buying some leap call options. These are call options that could be up to 3 years out from the current date. You go deep in the money ( as far away from the current price as possible) and you go for a delta of 0.90 or higher. When the delta is 1, this means the option will move in parity with the stock (i.e, when the stock moves up 2%, the option will also move up 2% – if the delta is 1 or 100%)
Why go with leaps instead of the stock outright?. There are a few advantages.
1. You can only lose the capital you invest. For example, If you want to buy 1000 shares of SLV today, it will cost you $15,750. However if we buy the Jan17-6Call for $10. This means that we could buy 10 calls for $10,000. The delta is high and we are controlling the same amount of SLV shares – 1000 shares. This investment is almost $6000 cheaper
The only drawback is the expiration date. If the trade is not going your way ( would be the same if you were holding he stock), all you do is roll your leap option out to another year in the future or exercise your options so you can have SLV shares at $10. Either way, I don’t see any downside to this strategy as long as you are nimble