Thursday, December 17, 2009

Out of Gold--1 parts profit and 2 parts frustration

An hour after the market opened Thursday GLD was off 2.44 at 109.10 from Wednesday's close of 111.54.  Fear clearly had the upper hand--for me as well as the gold bugs.   My 108 call options were set to expire Saturday--their time value eroding away rapidly.   Even though I had correctly called the top within 10 days my position was still not profitable.  Time for some action.

I sold the calls at 1.50 and hoped that the blow off would continue--which it did, touching bottom at 107.28--a  single day drop of almost 4%.   I covered my short position at 107.91, resulting in on overall profit of 0.95 per share.   While I expect GLD to continue falling to at least 104 before it finds some support, I also expect it to bounce up tomorrow after a drop of today's magnitude, and I am not comfortable holding a short position of that magnitude multiple days without some sort of protection.    I thought about a stop loss order, but my experiences with stop losses have almost uniformly been bad--for example getting blown out of positions by single day perturbations, etc.

While I was happy to escape with a profit, I am not happy with the overall result.  To make more than risk free returns requires us to predict the future--something I know I won't always get right.  So when I get it right I need to make enough to more than cover for the times I get it wrong.   Certainly I would have done better if I had been willing to take more than the 0.64 maximum loss I structured into the position, but when I created the position gold was on a bull run that continued from114 all the way up to 120.

Right now the only think I can come up with is to wait for the simple moving average, maybe 3 days, to signal a turn-around.  It would require moving quickly, but the position become profitable considerably sooner.

Click to enlarge.

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