Captain Ewave Options Protection Update!
Put options are a great way to protect positions.
Having said that, it should be noted that both the Captain and your editor have substantial experience buying markets in the “value” zone.
For example, when Bank America fell to $2 in 2008-2009, there’s no point in buying put options or using stop losses to buy that stock after it fell from $40 to $2. Just buy it.
It either lives and goes higher, or it dies.
If you use LEVERAGE, or the price of your targeted item is higher than the value zone, then some sort of risk protection is MANDATORY.
That could take the form of just buying in small size. For example, if your net worth is only $50,000 but you buy just $500 of GDX, you probably don’t need stoplosses or put options.
The same is true if your net worth is $100 million but you only buy 100k worth of GDX.
If you are trading bigger, then protection is a wise plan of action.
Tactics: You need to decide if you want to hedge your position fully, or just partially. For example, a GDX put option represents 100 shares of GDX stock. If you own 1000 shares, then 10 put options with a “strike price” at about the current price would be a full hedge.
Right now, the $21 April put option for GDX trades at about $167. So, you can protect about $2100 of GDX against serious price decline between now and April for about $167.
Jim Sinclair was one of the biggest COMEX gold traders of the 1970s bull market in gold. He uses the phrase, “Sell down to your sleeping point”.
We use the phrase “Protect to your sleeping point”. Maybe holding 3 put options for every 1000 shares of GDX you own does that for you.
Maybe it’s 5, or maybe it’s just 1!
Find the number that works best for you.
The April $21 put option is a decent place to start, for hedging gold stock positions.
Review all of the above, and we’ll be posting another hedging update next weekend.