Here’s how you make some great money on a triple Gold Miner ETF (NUGT) (June 30, 2016)
NUGT GLD ABX NEM NUGT
I’m going to look at NUGT ( NYSEARCA:NUGT ). This is something that I’ve been talking about for a while at Stock Market Mentor and at Option Market Mentor. I’m really bullish on gold, have been for a while, like on the way up as opposed to the way down. So I’m bullish on gold and I want to hold this as a longer-term position, not a trading position. It can kind of make you nuts because just today look at this, it’s a tiny, little day, it went up 5.5 percent. Here’s another tiny, little day. You buy it here at the top, 124.00, it closes down $10.00, that’s like a big swing. So I don’t really look at the prices, I just make sure that the chart is working in my favor. Typically these triple ETFs are great, basically for day trading or catching up with a move that you missed. But I like this as a long-term hold, because frankly, gold moves a little too slow for me.
But one of the things that I was talking about today (I think we mentioned it before too, but I’m not really sure, over in the forum at Option Market Mentor), was how to trade this. How to get your cost basis down in this. Look, the implied volatility on this stock is huge. The option contracts are really, really, very, very expensive. Why? Because this was a tiny, little day and it moved 5.5 percent. So if you’re selling calls or selling puts you’re taking on a lot of risk. Because the stock moves so much that if it moves against you, frankly you’re kind of screwed. So you’re going to charge a lot of money for that. Well, I own this stock, so I don’t have to buy calls, which are so very expensive, because the sellers want more money. Instead I can sell them. I can sell the calls against my stock, just a simple covered call, and therefore reduce my cost basis in the stock.
So lets say, lets say I buy the stock at 126.00. I buy the stock at $126.00. Now, if I sell the 120.00 or 130.00 calls in a covered call strategy, then I would make money if I’m called out. But I want to give myself some more upside here, so lets look here. Lets look and see what the 140.00 calls are trading for out into August. Okay, think or swim platform here. This is the August regular contract. Okay, the 120.00 calls, lets go at the money, we’re at 126.00, right? So the 126.00 calls, by the way, that’s your open interest, really, really super thin. Okay, look at this, 22.70 X 25.00. So there’s basically no market for this, I’m not trading this contract, but the point is, if I own this stock then I really don’t care because it’s designed to be a one way trade; I’m going to sell the calls and hope I get called out. So lets say I sell them for 22.70, remember I’m paying $126.00 for this stock. So I’m selling this for 22.70, I’ve got a basis of $126.00 in the stock so that actually drops my cost basis down to 103.00. So it drops my cost basis down to where, hey, I bought this thing right.
Of course the problem is then I’m basically making a set amount and it isn’t that great. But I think this stock is going to go up. So instead if I sell the 140.00s, I sell those, remember my cost basis is 126.00; I sell the 140.00 calls for 18.60, right at the bid, so that drops my cost basis on this stock down to $107.40. Again, we’re selling the 140.00 calls, August, for 18.60, right at the bid. So we’ve got a cost basis now of $107.40, so right down there, and if the stock continues to go up to 140.00 we’re going to get called out. Okay, what’s our profit? Our profit is $32.60. Again, we’re long at $107.40, we have to sell at $140.00, so that gives us a profit of 32.60. Now, what is our percent return in 50 days or something like that? It would be 30 percent. We get a 30 percent profit because we’ve got $32.60, our cost basis is $107.00.
Now here’s the other way you can do it, just sell these puts. You can keep selling these puts on this stock and if it doesn’t fall back you just keep the money month after month after month. Or, frankly, you can do what I’m doing, which is buy the stock, sell the out of the money calls, also sell the out of the money puts, so you’re getting double your fun. As long as the stock is moving in the right direction I’ll get called out of it on the upside, but I also get my premium on the downside and I’m making a lot of money. Now, what’s the worst thing that can happen? The worst thing that can happen is like in any other trade. This thing can reverse and then you wind up, you know you’re hedged on the upside because you sold your call, but you’re not so much hedged on the downside because you’ve sold a put and you’re losing money on the stock. So this isn’t a foolproof strategy, not by any stretch of the imagination or stretch of anything else. But if you’re looking at this ( NYSEARCA:NUGT ), if you’re bullish on gold like I am, trust me, if you’re correct you’re going to make a lot of money on this. You’ll make a heck of a lot more money than just like buying the GLD ( NYSEARCA:GLD ) or one of the gold miners ( NYSE:ABX ), which is fine, this is fine ( NYSE:NEM ). But I’m just saying, the bang for my buck is best when I am selling options against my stocks.
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