Gold for Cash
In my last post, just two days ago, I briefly outlined my plan for disposing of my GLD Dec calls. I said that I wanted to hit a price or time target, and when either thing happened I was out. Of course the very next day gold prices dropped 3%, and then another 2% today, wiping out 20% of the value of my calls. I'm not quite sure what's going on, but that was outside my comfort zone, and I dumped the calls today for quite a lot less than I planned. Now that I'm out, I'll detail my price/time limits a little more.
I bought the then-ATM calls over the summer for $5/share of GLD, believing that gold would appreciate in the fall. Boy did it, and it wasn't long before I was able to sell less than half of them for about $11/share. That took my initial investment off the table, and I kept the rest riding. I saw them reach somewhere around $17/share at their high, and I had a price target of $25/share to get out of the rest. That was pretty aggressive, but I also had a time limit.
Uncomfortable, as I said on Tuesday, with the many small indications of a coming correction in gold, I wanted out soon. I think most people are idiots (see the CS part of the CS+MACO trade), and when everyone's bullish, it's time to sell. Worse, literally the whole world is hanging on QE2-related verbiage expected in the minutes from the FOMC's meeting on November 2 & 3. That economic release is doomed: QE2 is already fully priced in, and all the Fed can do now is disappoint. At the very least, all the IV comes out of the options after the announcement because the inflection point will have passed. I definitely wanted out by Nov 2.
I have assumed for quite some time that I am riding a bubble forming in gold, and I swore that unlike the turn-of-the-century tech bubble, I would neither miss the run-up nor hang on for dear life during the pop. That's why I have been in and out of leveraged gold positions via calls for the last year or so, and that's why I'll get back in after the mid-bubble correction makes everyone hate gold again. I'm pretty bummed that I gave up so much of my profits by dumping today, but I still made about 150% on the trade since August, so I have no major complaints.
Speaking of CS+MACO...
Adding to the bearish signals this week, AAII published its survey results yesterday after the close: more people are bullish again. With the CS portion screaming "sell!" and the MACO portion insisting "buy!", CS+MACO is still flat and will stay there for at least another week.