by Michael Shulman | July 7, 2011 11:57 am
A strategy idea for options trading investors.
Uncertainty is increasing — the CBOE Volatility Index (CBOE: VIX), the market’s so-called Fear Gauge, is consistently higher than it was a year ago. The situation in Greece, despite the cheery headlines, is not close to being resolved. Credit default swaps on US Treasuries have risen in cost several fold in the past 12 months due to the insane, lingering debate on raising the federal debt ceiling and the growing possibility of a credit downgrade. I cannot even think of a default since there are no flights left to Mars to escape the carnage if we did default on our debt.
Uncertainty gives you several names to trade — the SPDR Gold Trust (NYSE: GLD), the ETF for gold; it’s cousin, the iShares Silver Trust (NYSE: SLV), the ETF for silver; the Market Vectors Gold Miners ETF (NYSE: GDX), a second cousin to the GLD ETF; and the iPath S&P 500 VIX Short-Term Futures (NYSE: VXX), the exchange-traded note for the VIX and a measure of market uncertainty.
The GDX is the only cheap one that should continue to go up over the long haul, even if the price of gold stalls or drops. The miners are cheap based on historical comparisons with the price of gold. GDX is an excellent hedge against market uncertainty as well as being a very good, undervalued name in and of itself.
How to play the GDX? Two ways — very short-term and very long-term.
Short term — and I mean really short term — there are GDX Weekly options. You should consider Weekly calls, be sure to look at the in-the-money options. They are liquid and easily rolled. That means that as you make money you can reinvest the profits, or simply use the first chunk of capital you committed to the trade to buy calls that expire the following week.
Long term — and I mean really long term — I like the 2013 GDX LEAPs. Gold is going up due to fundamental demand not just due to fear and this can only help the undervalued mining stocks. I would look at the January, 2013 LEAPs, one strike or more in-the-money.
Michael Shulman uses simple trading tactics to make solid, profitable investments in falling stocks in his Short-Side Trader service.
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