Gold Trade Update, Market Comments

I woke up this morning and got out of my dubious gold trade with a 1 point profit. I lost money on the puts which I closed at the open, but this feels like a huge victory.

It was a poorly constructed impulse trade that could have gone much worse. NEVER use ETF options to hedge against futures, unless you want to lay out 10X as much money (risk) as you normally would.

This is where the trade could have really hurt me. It's one thing to use futures options; it's quite another to use ETF options which move 1/10th of the ETF which is 1/10th of the future. Because the delta was so out of whack, at one point I was facing a rare 1.5% drawdown on my account, which is admittedly not very deep but would still hurt.

I was cheap and thought the gold futures options were too expensive, and that's why I used GLD options. Bad choice. If the gold futures options were "too expensive" I shouldn't have done the hedge.

I was initially looking just for a bounce up to the 1515-1525 area. It could still get there. It just won't have me with it.

The stress and destabilization that this trade caused me were definitely not worth it. The only thing I did well -- the ONLY thing -- was that I did not act emotionally. Sure, I felt plenty of emotion. I just didn't act on it. That didn't make it any easier, though.

In other news, the Greek austerity vote this morning is a joke. This will not solve anything. It will get worse.

In many ways this whole debt crisis is like a bad trade that the EU will not close out. Rather than take the loss, they are compounding it by doubling down and praying for time. They are getting emotional and are acting on these emotions.

I hope Sarkozy got what he wanted with Christine Lagarde as the new head of the IMF. She's been helpful is buying time for the French banks so far. She may buy a lot more. The question is, will it matter. I for one feel that it won't. Banks are broke because they've never taken their losses and their so-called "reserves" are mere fractions of the total (and as-yet unbooked) losses.

Yesterday's call worked out well:

The S&P is still riding out the June storm, tucked into the lee of the 1258-1298 range. Perhaps we'll test or exceed the upper end of the range with some quarter-end, pre-July 4th window dressing.

The next thing I'm patiently waiting for is the 5/25 low at 1311.80 on the cash S&P. If this level is exceeded, I may flip my bias. It could mean that the 1258 level will hold, and I would switch to buying dips on weakness. The flip side is that a smaller 2nd wave could be forming, in which case a much larger decline would eventually lay ahead.

Should the market turn down from near current levels, I would look for 1258 to quickly be exceeded to the downside. I am testing this thesis with a small position, SPY 130 puts.