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NUGT trade ideas

TRADE IDEAS: THE 3X GOLD MINERS -- NUGT, DUSTTo be honest, I'm not an incredibly big fan of leveraged exchange-traded funds, particularly those subject to contango. In uninformed hands, they present opportunities for huge gains, but also huge losses. DUST and NUGT are both 3x leveraged instruments: DUST, a 3x bear; NUGT, a 3x bull. Here are a few important facts to know about these instruments: (1) Both instruments are meant to replicate a factor of the daily movement of certain instruments using a variety of leveraging techniques, including derivatives. The fact that they are shooting for "Daily" 3x movement and not something on a larger time frame suggests that these are not good "investment" vehicles, although I can see people wanting to dollar cost average in NUGT small and over time to take advantage of splits the underlying undergoes from time to time. My guess is that, intratrade, you'd be in for a "rough ride" if you want to play these that way. (2) The instruments and derivatives being utilized on any given day are somewhat "opaque." In other words, these funds' managers do not use a single index, instrument, or underlying, but may be using multiple underlyings and different derivatives of those on a given day to achieve fund goals. This is in stark contrast to an instrument like VXX, which is a derivative of a single instrument and where a direct and useful relationship can be drawn between current VIX "spot pricing", the pricing of VIX futures in front months, and the existence of states of contango and backwardation that can form the basis for actionable trades. (3) Because of this feature of these particular funds, it is basically impossible to cleanly or precisely chart a direct relationship between gold prices and these instruments. However, NUGT will move "generally" down when gold prices move down; DUST will move up. However, they will not necessarily move 3x the movement of gold, as the fund names suggest. They may move more; they may move less. (Friday, for example, XAUUSD moved down 2.47%; NUGT moved down 24.52%). (4) Because these funds' managers use derivatives to achieve fund goals, both of these funds appear to be subject to contango and backwardation (See Split History). NUGT price, over time, naturally declines with this effect; DUST, increases. Because of this, my tendency would be to trade these instruments with "the contango flow", buying NUGT or taking bullish assumption trades on "meaningful dips" and selling DUST on "meaningful rips." Although my take on these instruments is that they are meant to be "traded," rather than "invested" in, it's entirely possible for you to get caught in a trade longer than you would like. In that event, I'd rather be on the side of contango drift ... . For this reason and in spite of the fact that these instruments do not enjoy a direct, clean relationship with spot gold prices, I would nevertheless look at spot gold prices and price action before initiating a trade in either DUST or NUGT, as opposed to using these funds' price action to initiate a trade. This approach would be similar to my trading of VIX derivatives where I don't look at the price action of VXX, for example, to enter, I look at VIX instead in inform my entry. Next: NUGT -- Buy Shares or Sell Puts?
AMEX:NUGT
by NaughtyPines
2
NUGT -- SHARES OR SHORT PUTS?As a general rule, I don't like to hold shares in many underlyings, largely because it isn't that capital efficient as compared to making a similar play using options. With NUGT, however, I might make an exception, but, as always, like to compare and contrast. Buying Shares Advantages: 1. If I want to, I can go smaller and dollar cost average into a long position. 2. My max profit isn't capped out in comparison to the credit received for a short put, where my max profit is that credit. Disadvantages: 1. If current price isn't what I want, I'll have to wait. 2. Buying shares outright locks my cost basis into what I paid for the shares. Selling Puts Advantages 1. If I sell short puts here and price breaks through the strike, I can "roll" for additional credit and further reduce my cost basis in the shares should I be "put" the stock. From a practical standpoint, I can delay getting assigned or put the stock indefinitely. 2. The buying power effect of one short put at, for example, the 6 strike is lower than the number of shares the options contract represents (i.e., 100 shares). 3. Max profit, which is the credit received for the short put, would be greater than that experienced by the increase in value in share price if it doesn't move much or if it goes down. For example, the Dec 16th 6 short put is currently going for .48 ($48) at the mid. If the underlying finishes one penny above my strike (at 6.01), I keep the $48, whereas shares purchased at any price above 6.00 would have actually have gone down in value or be unchanged. Disadvantages 1. Max profit is locked in at the credit received for the short put. In the above Dec 16th 6 short put example, I can only make $48 max, regardless of whether the stock finishes at 6.01 at expiry or 32.00. 2. I will have to wait until the value of the short put approaches worthless to realize at or near max profit. In sum: If I go short put: I win "something" if price goes nowhere, sideways, or down from here somewhat, as long it doesn't break my short put strike at expiry. If I go long shares: I win, but only if price goes up. I can naturally dollar cost average in smaller in some strategic or sensible fashion, but "up" is the only way I can win. That being said, the reward of a "big up" exceeds the reward of a "big up" for the short puts. Short puts will win with a "big up," just not as much as shares will.
AMEX:NUGTLong
by NaughtyPines