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« Gold prices at new all time high | Main | All time highs in India »
Monday
Feb282011

Gold Trading Vehicles: SK Options Outperform

Gold Trading Vehicles: SK Options Outperform


We are often asked why we choose to trade options rather than the underlying asset. The most important reason is that options are far more versatile than simply trading gold or gold ETFs/ETNs. Using options we can increase our leverage if we wish to be particularly aggressive, whilst still limiting our risk.

When trading options one is not confined to simply be long or short, one can create positions that speculate on gold remaining in a certain range or above/below a certain level.

This versatility leads to great opportunities to not only profit but more importantly improve the risk/reward dynamics of each trade.




However to demonstrate this performance and illustrate why we trade options, we back tested all of the past gold trades recommended by our premium options trading service SK OptionTrader. SK OptionTrader recommends a capital allocation with each trade and runs a model portfolio as a template for subscribers to consider. So we simulated how our portfolio would have performed if instead of using options we had instead simply risked our capital in GLD for each gold trade. We also compared it to DGP, a double leveraged gold ETN, to add some balance since our options trades are often much more leveraged than the GLD stock.

As the graph above shows, using GLD has our trading vehicle our portfolio would have been up just over 20%, using DGP the portfolio would be up just over 40%, whereas using SK OptionTrader’s gold based trades the portfolio is up around 115%. (Note: This only includes the performance of gold related trades, not any other trades such as silver, oil, equities etc)

So our options recommendations have outperformed gold nearly six times over, and even outperformed DGP almost three times over.

We are not doing this to show our trading ability, merely the superior performance of options. Regardless of whether you think our views on market direction is correct, it is hard to deny that options have been the most effective instrument to trade gold, certainly for us.

Even if you are not a trader and are in favour of simply buying and holding, options could still have something to offer your investment portfolio. Since SK OptionTrader began offering trading recommendations to subscribers, gold is up around 45%, with the HUI index up around 50% and DGP up about 95%. So one would have needed to risk one’s entire portfolio in DGP to even come close to the performance of our gold options trading, and even then the performance is not beaten.

Keep in mind that we are not risking all our capital in each trade, rarely risking more than 5% of our capital, and at the most we may risk 10% of our portfolio in one trade. Quite often half our portfolio may be in cash, so this performance is not simply due to us taking on massive leverage; it is down to the fact that options are such versatile instruments and we have been using them effectively to trade based on our opinion on where the market is headed.


Feel free to check out our full trading record where we are averaging a return of 41.27% per trade including losses and contact us if you have any questions.

Alternatively you can subscribe below, for just $199 per 6 months or $349 for a year.

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Reader Comments (2)

Nice profits, but the trend has been up for 10 years, and they say everybody is a genius in a bull market.
I am getting ready to short gold at around 1450-1460, silver at around 36, there should be another good selloff towards the end of the year, we will see.

March 1, 2011 | Unregistered CommenterDi

Di,

If everybody is a genius in a bull market then why do persist with shorts?

March 2, 2011 | Unregistered CommenterGold Prices

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