Hello Investors,
The gold markets remain weak. Our discussion yesterday in regards to AAPL is very relevant to our trade in GDX. While we would expect AAPL to drift lower and GDX to drift higher. The problem is that we entered into a “low probability” butterfly. With a low probability trade comes a very high max reward/low risk number. Many traders fall back on that and simply say that the trade was always low risk so they hold and take a lot of max losses. Having traded these for many years, we think there is a better way.
We love the structure of an OTM butterfly. It gives us a way to lose a little if we are wrong and make a lot if we are right. However, we try to reduce our already small max risk number by exiting early if the trade isn’t working as expected. Then we try to maximize the large reward by staying patient on the trades when the stock is spiking into our butterfly zone. In this way, we essentially have even better risk/reward numbers over time. The downside is that we do take a lot of quick losses with this type of trading structure.
Exiting our GDX call butterfly
Sold to close: GDX Jan 15th (monthly) 40.00 strike calls (ratio of 1)
Bought to close: GDX Jan 15th (monthly) 45.00 strike calls (ratio of 2)
Sold to close: GDX Jan 15th (monthly) 50.00 strike calls (ratio of 1)
Limit credit: 0.50
Our covered call in AIG was exercised early. This is no problem as it was so deep ITM that an early exercise of a couple days is not uncommon. We end up with the exact same numbers as if this had exercised and “called away” our stock on Friday. So, obviously this is just fine with us as we made our max profit and have the capital free a couple of days early!
Have a great week!