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Hi, I am the Laptop Investor. I am from Adelaide, Australia and am passionate about Investing/Trading and have a passion for helping others and seeing them achieve success and reach their true potential. My existance online came about as a result of being told I am selfish in not sharing my... More
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  • How To Earn A Steady Income From Gold

    Before I get started I want to highlight that this trade idea is not a direct play on Gold yet takes advantage of the inefficiencies of a triple leveraged Fund such as Direxion Daily Gold Miners Bear 3x (NYSEARCA:DUST).

    I have chosen DUST, as the optimum time to make a trade exploiting the inefficiency of the triple leveraged funds, is when the underlying It tracks is at a particular extreme.

    So I discussed that this trade is not a direct play on gold however in my opinion gold is near its bottom or has limited downside left in it which makes this trade relatively safe and ideal.

    To get an understanding of the beauty of this method, you will need to understand how triple leveraged funds work and how the long-term decay is their weakness. I have already written an article on this utilizing Direxion 20 Year Treasury Bull fund 3x (NYSEARCA:TMV) as an example.

    I have attached a chart below on Direxion Daily Gold Miners Bull 3x (NYSEARCA:NUGT) which is the exact opposite of DUST. You can appreciate from looking at DUST that about 2 ½ years ago it was trading at $2100 yet today is trading around $25.

    The uneducated tend to get fooled looking at this chart believing that because it's a leveraged fund tracking gold (miners), that if they were to enter at today's prices, they can expect to see it reach $2100 again when gold decides to appreciate. That would make an 8400% return. Sound too good to be true? Absolutely.

    (click to enlarge)NUGT

    To further illustrate the principles of this idea I have labeled a chart of DUST with some observations. Take note of June/July 2013 and today. While the gold miners made a fresh low in June/July, DUST peaked around $82.50. In contrast with today the gold miners have actually made an even lower low.

    This highlights my point wonderfully. If DUST didn't decay at all and had a 1:1 inverse relationship to the gold miners it tracks, DUST in comparison should be above $82.50 yet the reality is it has depreciated 38% and will keep on depreciating/decaying.

    (click to enlarge)DUST

    By now it should be apparent that regardless of where the price of gold goes this trade will make maximum profit as long as we are at or near the bottom for gold and gold miners.

    TRADE

    So how would you trade and take advantage of this inefficiency. I will detail a method below and as for the return on margin, this will depend on your broker. I understand that some brokers due to CBOE requirements will require a substantive margin while others accept a percentage of the underlying. I am going to base my figures on 25% margin as that is the margin requirement my broker demands for a short-call on DUST.

    I have chosen to sell a Jan 15 expiry, 65 Strike for $18.20 premium.

    This can be varied but I have chosen the above due to how far out the money it is, the premium it generates and the margin of safety it provides me.

    RETURN

    Total return on expiry will be 144% or 12% a month.

    RISKS

    • Gold drops in price significantly
    • Gold keeps drifting lower over the months (however decay may be on our side dependent on rate of decline)
    • DUST goes above my break even point of $83.20

    SUMMARY

    Overall there are many ways one could chose to profit from a decaying fund. I have chosen a relatively conservative approach, as one could choose a lower strike price or simply short the underlying. The danger and reality however is that given a sharp drop in gold miners, DUST could rise rapidly.

    At the end of the day I am relatively happy with this trade as it provides a nice return and 65% margin of safety. With time and decay on my side I can enjoy the income and reap the rewards of this exploit.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Dec 09 5:08 PM | Link | Comment!
  • Bonds: The Ship Is Back In Port

    Over the last few years the market has been rather manic-depressive. It has been challenging and testing for even the most experienced traders. Despite all this movement the overall trend of equities has been upward. Some will argue that the bullishness in equities is due to the U.S. Fed propping it up with its bond purchasing program. With an additional trillion dollars pumped into the money supply each year it certainly is going to have an effect.

    (click to enlarge)M2 Money Supply

    A key point I wish to highlight however is this; the U.S. Fed are constantly reviewing the market for signs it has been kicked back into life before taking the training wheels off. The significance of this is that the Fed is very aware that without its help, it will fall flat on its face. While no one spells it out like this, it's akin to the U.S. Fed blowing wind under the wings of the economy until it can soar on its own steam.

    This last month has made that very clear with discussions on tapering QE. While the economy overall is definitely improving, now that the end of QE is in sight, this has caused the market to stunt its growth of late. Naturally this has prolonged tapering and in manic-depressive fashion the market caused yields to drop.

    There are two certainties facing the U.S. economy. That is QE will stop and interest rates will rise. The only uncertainty on that front is when. While I expect QE to wind down early 2014, I don't expect the official rates to rise until at least 18 months after the cessation of QE.

    With all this uncertainty and manic-depressive gyrations of the market it has caused the ship to come back to port in relation to a trade I discussed some weeks ago. This has been the yield trade and trading the Eurodollar. If we look at May this year we can see the Eurodollar began a convincing decline. This was a result of the U.S. Fed hinting at tapering, and naturally the Eurodollar has returned at these initial levels with hints now that tapering wont occur.

    (click to enlarge)Eurodollar
    Eurodollar Continuous Future

    So what does this mean? As Eurodollars are traded on Futures markets it is the markets expectation of interest rates rising in the future. As I have reiterated above, there is no doubt yields will rise, the only question is timing. So as a result I have resorted to going short long dated futures (GEZ5). While this trade itself is asymmetric in nature, it can be traded also via contract options, for those who want the safety of options, or are concerned of the downside risk.

    I was over whelmed with my previous response on this trade and if one had entered on my previous article, it would have been rather profitable on the ride down. On the Eurodollar, 100 basis points is the equivalent of $2500 per contract. Over the longer term, i.e. 2016 and beyond I expect interest rates to normalize to historical averages. This would see the Eurodollar drop hundreds of basis points and this is where the true asymmetry of this trade will really leave people in awe.

    I understand for the amateur investor that trading Futures can be intimidating. The other method to trade yields is via bearish ETF's such as the Direxion 20+ Year Treasury Bear Fund (NYSEARCA:TMV) or Proshares 20+ Year Ultrashort (NYSEARCA:TBT) by going long. I suggest reading my earlier article on TMV to appreciate the inherent risk with these leveraged ETF's. Otherwise trading bonds directly through an ETF such as Ishares 20+ Treasury Bond (NYSEARCA:TLT) will suffice. This trades directly to U.S. 20 year bonds, so therefore to play a rise in yields you would go short TLT. It is important to note these ETFs are a play on long dated yields whereas the Eurodollar is a play on the 3 month rate. To date, these yields have not moved with the intensity the long term yields have.

    The other added benefit to this trade is it provides an interest rate hedge for those who have invested using leverage and are at the whim of future rate rises. Naturally before entering any trade, do your due diligence.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am short Eurodollar futures.

    Tags: TBT, TLT, TMV, bonds
    Oct 01 1:16 PM | Link | Comment!
  • What The Hell Gold?

    With Gold (NYSEARCA:GLD) and its poorer cousin Silver (NYSEARCA:SLV) recently catching so many people off guard it could be easy to fall for the many sensationalist claims that we keep hearing about.

    Firstly I don't believe Gold Prices of $50k or even $10k are likely in the foreseeable future nor do I see Gold declining much lower. That is however not to say that there wont be any additional decline under recent lows.

    Its easy to become victim in the recent panic and be swayed by the many opinions out there which at times begs what these claims are backed up with.

    To begin with, understanding what the production cost of Gold is, I would be rather surprised to see Gold fall below $1300/Oz and Silver $21/Oz. It most certainly is capable of doing this yet I'd envisage it to be short lived.

    (click to enlarge)Inflation Data

    Of late there has been a clear deflationary tone to the global economy. Lets look at US inflationary data on the above chart. Inflation since last year has been trending downwards, so its no surprise that precious metals have declined. While inflation remains above 1% I'm personally confident that any correction or bearishness will be contained however also note that where QE1 and QE2 has caused spikes in inflation QE3 has not had this effect.

    There is no doubt that QE3 has artificially allowed the stock market to reach new highs recently. Whether the rally continues that remains to be seen however looking at Junk Bonds (NYSEARCA:JNK) and Small Caps (RUT) they remain upbeat.

    With a slow down of production in China and expectations of key regions such as USA and Europe not meeting GDP forecasts this has further placed fear in how much the global economy is actually growing. I like to look at a few commodity indices as leading indicators on global sentiment. Comparing commodity indices such as Power Shares DB Agriculture (NYSEARCA:DBA), Power Shares DB Base Metals (NYSEARCA:DBB) and Power Shares DB Commodity Tracking Index (NYSEARCA:DBC) they are all at long term lows. Not quite that of GFC levels and I wouldn't expect levels to that magnitude anyway. So in summary Im of the opinion commodities are trending at major support levels.

    (click to enlarge)

    Base Metals Power SharesAgriculture Power Shares

    (click to enlarge)

    Commodity Tracking Index

    The last thing I wanted to touch on to add to the uncertainty already in Precious Metals is the price of Oil Futures and their state of Backwardation.

    At the time of writing the Spot price for Crude Oil (NYSE:WTI) was $92.81 yet future prices of:

    $88.33 for December 2014 contracts &
    $86.29 for December 2015 contracts.

    With future prices of oil nearly always in a state of Contango to allow for storage fee's and interest etc this is highly unusual. So what the market is in effect saying is it's expecting a decline in oil prices in the foreseeable future. This isn't a positive sign for our beloved precious metals.

    So in closing while I have no idea where price may go, for the reasons above I don't expect further downside unless Inflation were to dip under 1% and GDP announcements surprised significantly to the downside. At the same time I wouldn't be expecting Gold/Silver to make new highs any time soon due to the uncertainty the market is embracing right now and a lack of significant growth and inflationary pressures.

    The Laptop Investor

    Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I may further initiate long positions in "GDX" and "SLV" over the next 72 hours.

    Apr 28 1:09 PM | Link | 2 Comments
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