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Gold (and Gartman) Haunting Some Investors

An at-the-money option would have a delta around .50 unless you're on the eve of expiration (when delta would be zero). Delta DOES matter. Greeks DON'T disappear at expiration. An in-the-money option at expiration would have, for example, a delta of 1.

Time premium is predicated upon volatility assumptions. All of the other inputs in an option price model could be similarly perceived by all market participants; the one variable that's unique to each trader is the forecast for the asset's volatility over the option's life.

There were no other time frames to consider for DZZ's performance when the hedge presentation was made. What you saw in the example was performance from inception. An update on DZZ's post-conference performance can be found on the Hard Assets Investors site at "Did You Hedge Your Gold Stocks? (www.hardassetsinvestor...) .

The purpose of a hedge is just that ... to hedge against an unacceptable risk. If one didn't anticipate rough sailing ahead, or if one wasn't facing some other circumstance that precluded sale of an asset, one would remain unhedged. But there are times when assets must be held in tempestuous markets . An investor, for example, who's already taken a full complement of short term losses for the year might want to hold gold mining shares until they qualify for long-term capital gain/loss treatment.

There's no presumption in the presentation that alpha is positive. Excess returns can be, and as we've seen often, ARE negative. In this case, a negative alpha would be symptomatic of management's failure to beat the performance of the gold market. Beta's a matter of perspective. There are, in fact, TWO betas associated with gold mining stocks: equity risk, which can be hedged with a stock index product AND gold risk, which is addressed by DZZ. There's still plenty of beta in Hecla even after hedging with DZZ.

As for taking a "married" position (gold mining issues plus DZZ) at the outset, that's purely an alpha play. You'd be treating the mining issue as you would ANY equity issue. If you were looking for gold performance, buying gold itself would be more efficient.

Gold (and Gartman) Haunting Some Investors

An option trader who fails to appreciate the risk factors represented by the greeks is flying blind.

Without considering delta, at least, how can you determine a hedge ratio? You won't get dollar-for-dollar price tracking between the option and the stock until the option's deep in the money.

GDX was used in the article above as a proxy, not as a trade recomenedation. Look at the examples given in the "Hedging Gold's Volatility" article and you'll see how the DZZ hedge worked against individual mining stocks and a small non-GDX portfolio. Alpha could, indeed, be stripped out.

Gold (and Gartman) Haunting Some Investors

Riskwise, owning a put against stock held long is, indeed, a synthetic long call. Diagram the risk/reward payoffs of a synthetic and a "natural" call with the same effective strike price and you'll see they're identical.

There are more unknowns embedded in options than in stocks. Each of these "greeks" (delta, gamma, kappa [vega] and rho) is a variable risk factor that influences the option's price trajectory. The only "insurance" one has is in the expiration pay-off. One pays for it through the premium. Option premium must be paid to roll the insurance forward. No premium is attached to the purchase of stock.

Don't get me wrong. I'm a big believer in options. But not everyone else is.

The hedge example presented at the Hard Asset Conference was directed at shareholders who bought gold mining shares in the belief that their stock would outperform bullion. Hedging out gold's influence with DZZ does NOT negate the upside, it merely isolates the outperformance in the stock (if any) that isn't attributable to gold's movement. You'll see this illustrated in the examples presented in the "Hedging Gold's Volatility" article. The proposed hedge, in fact, relies upon this "mismatch" to allow the stock's alpha to filter through.

There were no GLD options extant at conference time and GDX options would hedge away the very alpha stockholders wanted to preserve.

Gold (and Gartman) Haunting Some Investors

Let's go back to the focal point of the article for a moment. The fact that the DZZ-hedged position in GDX still returned a loss says one of two things (or both):

1) The hedge ratio needs to be adjusted dynamically, and/or

2) There's something "wrong" with the management of the companies making up the underlying index.

If the hedge ratio remains constant over the life of the hedge, gold's influence from GDX should be negated, allowing the underlying companies' management "alpha" to emerge

There was an 8 percent residual loss after hedging. A little number-crunching should tell you if it's the fault of the hedge or of company management.

Gold (and Gartman) Haunting Some Investors

Silveraxis -

Put options are indeed an possibility, though they come with a whole new set of considerations. DZZ offers twice the inverse return of its underlying index without an extrinsic cost. That's a degree of leverage that exceeds that of an at-the-money option.

An option is a wasting asset; if it's out of the money at expiration, the put premium is forfeit. Holding a GDX put with GDX shares, in effect, creates a long call on GDX. And, as we all know, calls can sometimes expire worthless.

There's no such cost in DZZ. Neither is there an expiration, so rolling costs are eliminated.

Play Your Short Game in Gold

GMiki -

COMEX June gold had last settled at $894.50 when you wrote your comment. Three trading sessions later, the contract settled at $869.20.

Some might consider a $2,530 return a nice short. At exchange minimum margins, that's a 59% gain.

52-to-1 Just Right for Gold/Silver Ratio?

There may, indeed, be no predictive value of the gold/silver ratio, but that doesn't mean it doesn't get watched. The ratio is closely followed by the value investors of the metal world (see "What's Better: Gold or Silver?" at hardassetsinvestor.com...).

Gold/Silver Ratio Still Widening

Donaldo -

The green line at the bottom of the chart tracks the gold/silver ratio (gold over silver) basis the daily London AM fix. "47.1" means one ounce of gold, at market prices, could purchase 47.1 ounces of silver.

The blue and red lines, however, trace the indexed values of the DB Gold Double Short ETN (DZZ) and the iShares Silver Trust (SLV). By "indexed" I mean that each security's starting price set at "100" to make their price actions directly comparable.

Leveraged Gold ETFs: The End of Gold Stocks

Dave M -

A commodity-based exchange-traded NOTE won't issue a Schedule K-1, but and exchange-traded FUND might.

Translating Currencies through Gold

Gold is traded internationally, as are currencies, with global delivery points.

Work done by David Parsley, of Vanderbilt University, and Shang-Jin Wei, of the International Monetary Fund, indicate that prices for goods traded internationally converge towards purchasing-power parity quite quickly.

Translating Currencies through Gold

Taxes and transportation cost differentials amounting to 32 basis points?

Got some numbers to compare?

The Long and the Short of Silver and Gold

Nate, the HAI article linked to this story ("What's Better: Gold or Silver?": hardassetsinvestor.com...) contains a table tracking the gold/silver ratio through the 20th and 21st centuries.

If you want finer grain detail of modern-day prices, try the historical statistical archives of the London Bullion Market Association at www.lbma.org.uk.

The Long and the Short of Silver and Gold

Misterchan, DGZ and DZZ are exchange-traded notes (ETNs) issued by Deutsche Bank that track the 1x (DGZ) and 2x (DZZ) the inverse of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold.

ETNs differ from exchange-traded funds (ETFs) in that they are senior, zero-coupon debt instruments rather than representing a portfolio of futures like the PowerShares DB commodity funds.

As zero-coupon notes, they pay no interest. Issued at $25 pe back in February, their value fluctuates based upon the return of the underlying index. The are tradeable intraday and price-transparent as are ETFs.

At present, there's no tax consequence for holding these ETNs (until liquidation, that is), giving them a decided advantage over gold ETFs like DBG and grantor trusts such as GLD or IAU.

More information can be found at: dbfunds.db.com/notes.