VTS Community

Tomorrow I will give an update on our CVS trades within the VTS Discretionary Strategy as we are coming into expiry.  The short version is we’ll do nothing and let them expire but I’ll explain all that tomorrow.  Today though we have an opportunity for a new VTS Discretionary Strategy trade.  The target:  Gold.

* For those not interested in option trading, ignore today’s email.  Remember the VTS Discretionary is a free strategy for the community but it’s completely optional.  I’m just trying to teach a full tool box of option trades for those interested.

For those interested feel free to follow along  (in a paper trading account if you like)  and take the trade today.  You can always circle back in the next few days and study why we opened it and ask me as many questions as you like about it.  I’ll also do a video explaining the exact same trade next time we open one so there’s both formats available.  I’ll do this for all discretionary trades by the way.  An article or video the first time, then the other one the next time we do the same trade.

 

1 year chart of gold futures:

 

You can see in the chart above, gold has attempted and failed several times to break through that 1365 range in the last year.  We’re coming into another one today and this provides us a nice opportunity for a short term trade.

Now for anybody who’s following our Bull Put Spread on the SPY, you may notice that it’s quite a similar set up to that trade.  Testing a resistance level with a likely move coming.  So it may be tempting to just do the same trade:

 

Will it break higher?

If gold breaks through that resistance level and goes higher another Bull Put Spread would be a very effective trade to capture that movement.

 

Or fail again and go lower?

If it’s another failed breakout we’d need the opposite trade, which is called a Bear Call Spread.  This one would profit from the fail and price decline.

 

In my opinion gold is one of the most unpredictable assets out there.  Just ask any fund manager that specializes in trading gold.  What you’ll notice if you follow their work is, most of them spend about 50% of the time being wrong and I would be too if precious metals were my main focus.  Every time I think I’ve got it figured out, found a correlation it’s tracking, or noticed some technical patterns it’s following, boom it switches and does the exact opposite.  Gold definitely marches to the beat of it’s own drum.

I’m not confident in picking the likely direction for gold as we come into this resistance line again.  Gun to my head I would say it will fail, but that’s purely a guess and I only gamble on the golf course when I’m in control of the outcome  🙂  so I’m going to open a Long Straddle Option.

In our 25,000$ VTS Discretionary model portfolio:
BUY to OPEN 7 x GLD 18 May 2018 128 PUT
BUY to OPEN 7 x GLD 18 May 2018 128 CALL

 

A Long Straddle Option is comprised of a Long Put Option and a Long Call Option opened simultaneously.  This way we aren’t required to choose a direction for the underlying, we can profit in either direction.  We will use the ticker GLD for this trade and a May 2018 expiry in 30 days.  It will look like this:

 

Long GLD Straddle with current price marked in yellow:

 

* Note that the premium may be different by the time we open the trade so check the trade details below carefully.

All Long Straddles look like this.  Because we’ve opened both a put and a call at the same time, we can profit by movement in either direction.  We don’t have to decide whether we think gold will finally break out to the upside or fail again and go back down, as long as it moves.

So up or down is fine with us, but since there is no such thing as free money and no reward without risk in investing, the downside to the trade is if gold is very stable over the next week or two.

 

Profit / Loss ranges:

Strongly up or down and we’ll make money.  No movement and we will lose money.  If you’re not familiar with the option Greeks you can read about them here.

Long Straddles:

Delta neutral  –  We don’t care which direction the underlying goes as long as it moves.

Vega positive  –  We profit if volatility rises and lose money if volatility declines so it’s always best to open these trades when volatility is in it’s lower range if possible.

Theta negative  –  Every day the price of gold stays where it is we will be bleeding capital so we won’t be keeping this trade open for very long.  If we don’t get the movement soon we can’t afford to just let this trade run and lose daily Theta.

 

Most of the time option trading is about volatility much more than price, but there are times when we use options to make a play on prices and todays Long Straddle is one of those.  However we definitely want to pay attention to the volatility  (Vega)  aspect of the trade.  It’s not a good idea to open Vega positive trades when volatility is very high so we need to check that.

 

GVZ is the volatility index for gold.  Here’s a 3 year chart:

Gold volatility is not currently the lowest it’s been, but it’s still within it’s lower range of the past few years so it’s still ok to open this trade.  If the GVZ was in the mid 20’s though I would not open it.  Vega is the strongest Greek in this trade and we simply can’t afford to be fighting an uphill battle against volatility.

 

So as always we’ll keep our allocation size small.  This trade risks about 2,500$ on the 25,000$ model portfolio so roughly 10% of capital.  We also will not hold this to expiry.  If we don’t get the gold movement we want within a week or two we’ll be out of the trade.  Feel free to ask any questions you have about this.

Straddles, both long and short are common and popular trades so have fun with this one, there will be more in the future  🙂

 

Current VTS Total Portfolio Solution Allocations

10% VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

10% VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

50% VTS Tactical Balanced Strategy

20% VTS Iron Condor Strategy

10% VTS Discretionary Strategy

Temporarily paused:  VTS Tactical Volatility Strategy

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