Note: I did a video lesson on call options for miners to give you a better understanding of what call options are and WHY I use them, but this will specifically address trades FROM this setup and when I sell 4-6 weeks from now, if I do, I want to follow up with the profits (or losses) made from these. Note at the end I also talk about common mistakes and some of the screw ups I made early on to help you. Now, I’m pretty confident with these. I am showing you my trade here to EDUCATE you on what I was thinking. Do NOT do what I do, or you may lose a LOT of money.

Edit: I’m not a professional trader and this is NOT financial advice. Do not listen to internet idiots like me. I’m trying to provide examples on a complex subject and wanted to take you along for the ride.

All – I’m putting some details out that might be a little sensitive, but I want to show you how I play call options for miners. In THIS particular case, we saw gold and silver get absolutely HAMMERED this week. I can actually claim I saw it coming for once and was in a LOT of cash. Some miners I had just recently bought I was able to sell quickly for minimal loss – they were some long play juniors and they weren’t hit with the price smash others were.

Getting into cash

What I have learned in the last 18 months or so of doing this is to have perhaps 50-80% of my mining stocks as longer term holds. I might take 10-20% if the RSI (Relative Strength Index) is really high, or I might then add a little to them if the RSI is REALLY low. I usually buy juniors in at about $2,000. So we can take Alexco for example. I had bought in a long time ago with Alexco and I saw my balance on them was like $3,100. I saw gold and silver RSI were getting up there, and felt Alexco and others might pull back 10-20% on any corrections. So I sold $1,100 worth to take me to $2,000. IF, at the end of the correction, my balance was $1,600, I’d then take $400 to top it off to $2,000. Rinse and repeat with this strategy. Short term. For most of mine that have a 2x, I’d sell half and pocket the other half and then never touch the other one again. Unless it got stupid high.

Anyway – I sent out an alert awhile back that I was getting into cash…This had me also take some profits from the items like above with Alexco. I also sold out of my Peru miners and sold a few dogs that had 10-20% loss.

Now – the challenge was to hold and wait for a correction. It’s a lot harder than it sounds, as you always feel cashing sitting around isn’t doing anything. I also put something out awhile back that I was getting out of most of my options. I took my portfolio from about 50% options to 10%, and got rid of all short term options. I was worried about a greater market correction. So I took a lot of that option money and went into things like Wheaton Precious Metals and GDXJ – so if there WAS a significant drop, metals would catch a bid first, then reflate – with options I’d lose everything, but holding the shares I could weather the storm.

The setup

This past week, we all saw gold and silver get monkey hammered, but this really was overblown in my opinion. The idea that they could move gold $100 on the idea that MAYBE in 2 years we MIGHT raise rates by .25 to .5 points? Everyone sort of laughs at the idea that the fed will ever raise rates again, and they just injected $7 trillion into the economy and are trying to use jedi mind tricks that inflation is more or less a temporary thing. Where there is a HINT of truth at that is the base effects YoY, and yes, they will recede, but the genie is out of the bottle and the pin was pulled on the grenade 15 months ago and the delayed effects of this cash injection are thought to be 18 months, so we can see base effects recede WHILE we see MoM effects increase. This then led the fed recently to say inflation may be more than they anticipated and longer than anticipated. Still, they claim they have “tools” to fight it. Right now, the only thing the fed has done is run their mouths and try to move the markets on mind tricks and hints of moves years from now no one believes will happen.

So gold got hammered $100. And wow, a gift fell into my lap with lots of cash on hand.

What I did was something YOU should not do. I bought on the way down, anticipating bottoms had been hit. Any REAL trader out there will tell you that you wait for confirmation first. Well, I was using some probability here that I am fairly certain I was buying NEAR bottom. I did not go ALL in when I thought a bottom was in. I used like 1/3rd of my cash to get some options at the 50% fib retracement. Some others I got just before that from ideas from the Silver Chartist on entry points. Then, at the .618 fib retracement, I went mostly all in. Mind you – I have plenty of GDXJ and WPM I can liquidate quickly in a pinch for minimal loss, but the idea here is to show you WHAT I bought, when, why, etc.

Sorry for the blurred image, but I took a pic on my camera just as I bought in. BOTH gold and silver hit the exact same lines.

Image

So what we have here is:

  1. Really low RSI, both gold and silver were high RSI with the daily charts and these moves the last 1-2 weeks have worked off a high RSI into oversold.
  2. 200dma and 50dma on a lot of these are in play
  3. No real fundamental change in the play of gold and silver
  4. Smells of desperation selling to shake out weak hands to buy back cheaper ahead of Basel 3 implementation
  5. Last summer, almost to the day, gold started to run $377 over 6 weeks. Silver went from $19 to almost $30 in that time. GDX moved up almost $15 in six weeks
  6. There has been a YEAR of people taking significant amounts of metals off of the COMEX. It stands to reason that the reduction of metals and increase of Open Interest significantly increased the ratio of paper to physical – which puts a lot of stress on risk management desks.
  7. Almost all technical people have called for an awesome 2H for gold and silver
  8. Fib levels hit and bounce off of.
  9. The “strong” DXY at 91.5 which pushed gold down? The DXY was 92 last year when got hit $2,088, so I don’t want to hear it. The DXY is the immediate movement for gold at the moment, but gold was $300 more at a higher DXY last summer.
  10. Real Rates are pretty much the most negative I have seen in my life. With REAL inflation continuing to be evident to everyone, those of us who got in on this 18 months ago are starting to see vindication for our positioning.
  11. The dollar appears to be out of trend, overbought, and I don’t see it peeking above this line for long.
  12. When STRONG moves up happen, you see people selling profits and a sharp move down happens. When a sharp move down happens, people realize it’s a steal and buy in – and this massive buy in I am betting will cause a sharp momentum trade up.

Lastly – most people agree somewhere in the 88s, the DXY is in free fall mode and gold and silver may light up the sky if this is crossed.

The BIG idea here is we have sought to buy options at a bottom, or close to it. We want to compare how doing these, at this time, works.

So I took a gamble when I bought tranches that there was limited downside yet, and if the GDX mimicked last summer, I had a 7.25x in my options I wanted to buy. Check out the video for the math – as I show that the same amount of money I used to buy 20 call options could have bought 111 shares of GDX – giving me ultimately a 20x time gain with using options over just buying the shares. This was the setup for the play – perhaps 50% downside risk with 7.25x upside gain in possibly 6 weeks.

Risks?

  • Bigger market correction persists for weeks and drives DXY way up which could drive gold further down
  • Basel 3 doesn’t have the effect we thought, and there’s a sell off
  • Market CRASH which takes gold and silver further down

How to mitigate the risks?

  • Have options out far enough to hope to counter any negative effects
  • Buy at oversold RSI levels and time entry points to bounce off of fib levels and account for 200dma and 50dma
  • Buy in tranches so you don’t go all in and the bottom falls out
  • Have in mind downside targets to sell. If it drops 50%, perhaps sell. Maybe it drops FAR from there, you can use that cash to buy in far less and make that money back.

The options

So I bought these on Weds, Thur, and Fri. I also bought some of these earlier in the year and are listed. I know the news was on Wed, but the MTA options were aside from this setup and a trade idea from the silver chartist.

The takeaway from this table….

  1. I bought a VAST amount of SILJ options when SILJ was higher. Bought these for a LONG hold. So this makes up about 60% of my loss at the moment
  2. Options are VERY volatile. This number here, with one good day, could completely flip all to green. So you cannot sweat this too much.
  3. My REAL concern on this is the GDX at $39 for Sept 17th. They are over 50% loss. I typically pull the rip cord at 50% loss, but I feel there will be a V recovery next week, which should actually put these in the green.
  4. Friday at end of day there was a massive spike down on volume, as if someone wanted to flush out week hands right before close on stops. I didn’t set any for just this reason. I am expecting a strong bounce this week.
  5. When I get a little over extended with options, those I bought at the bottom I keep and when I break even with some of those furthest underwater I may sell at break even prices.
  6. Overall down 29% on the most brutal few days I’ve ever seen. Now, my turn.
  7. Most of my call options listed here are for Sept, but those most underwater are for Jan. I’m expecting $50 silver between now and Jan and these options are going to scream.
  8. David Hunter predictions – if anywhere NEAR true, may make that chart above look incredible 6-8 weeks from now. Assume $45 GDX, $35 SILJ I’m looking at serious cash here.

Now – take some of the inputs of targets I expect, and you start to see where this goes when gold and silver eventually take off.

Now, here’s the REAL truth of this. No one is going to sell at the absolute top.

With options, I tend to try and sell half at a double. This gets me FREE options and I then get my seed money back. However, those items I bought at .618 will most likely get me a LOT more torque than those I bought at .50, or those SILJ options I have been buying for months. So with the items I bought on the 17th and 18th, I am looking for stronger returns, and thus on a sharp move up, will not sell half on a 2x, but perhaps 1/3rd on a 3x. Here’s how this then looks when I add my strategy to it.

So assume there’s a STRONG move up in gold and silver in the next few weeks and I hit my initial sell targets. I probably have these things on limit sell orders just sitting out there in case someone hits “market” or there’s a sharp move when I’m not around. Let’s assume all initial targets were hit and sold. This gets me my seed money back within a few weeks, possibly.

This is what remains. For “free”.

My guess is that I will sell into price rises and I won’t hit these targets. Being able to sell options at 2x or 3x helps de-risk your holdings – IF I hit those initial targets, AND the market takes a 20% haircut, and ALL of my remaining options go to zero, I at least got ALL of my money back on them.

So what you see then in the “cost” area is that I have virtually no cost for the remaining items. This is inverse, so -175 cost means it made me $175. My remaining cost was $121 which then gets me a return of $118k.

This is ONE LEG of a bull market. I would expect this, to be true, could be a 6 month run up and then maybe a 2-4 month pull back. If I’m in cash near the top here and RSIs are like 75-80 on things, I’m in mostly cash on “trade” money. Some of my long term holds, I will do what I said – trim 10-25% or so of some profits. Then, on the move down – be patient. Let the RSIs move lower. Let the next leg up start, and a LOT of this cash I can then do the same thing – remember, that $35k I got back, I can do the same thing. Perhaps with that $118k I would take $30-$40k out to pay for credit cards, fix up rentals, make additions to my house – and that leaves perhaps $80k to put into juniors, explorers, junior producers, producers for the next leg up – and increase my positions on companies I love.

This is how options can grow your wealth during a bull market.

In my video, I mentioned that had you put all of your money into Newmont this time last year, and checked your account today, you would not be up anything at all. On market pull backs, I like options here to play the torque up. The risk here is obvious – too much market downside and NOT managing risk appropriately can lose me all of that cash. Those items over 50% loss now? In theory, I could sell them at 50% or so loss and take a few thousand loss.

When I do sales down the road, I plan to create a new post with some updates. Different initial targets will be hit at different times, so I will record them in my chart and check back on this potentially in a month or so.

I hope this helped everyone at least SEE why you might want to do call options! Good luck and good trading everyone!