Changing a Profit Curve
I'm making some good paper profits on my GOX spread. I sold the Dec 140 Puts at an opportune time (see prior post).
As the price showed me a profit, instead of recognizing the profit by selling, I started to build a spread; which is a hedged position. Today I increased the short side of the hedge by buying more puts (see ticket to the left). After several years of spread building, I can usually visualize the profit curve that it generates, pretty well. But it always worthwhile to graph it, to quantify the exact tradeoffs.
Below is the profit curve before and after today's trade (click on images for full screen view):
Before the trade I clearly favored a bullish GOX index and after the trade I now favor a bearish one. The reasoning is that the GOX index has climbed from 126 to 141 in quick order, and I anticipate some "back and filling' in the price. At that time I will do some more selling of the Dec 140 put.
The macro factors to keep in mind are that Bernanke will probably have to cut interest rates to save the financial markets. That will put the Fed back on track to do what they do well; that is to destroy the dollar. That makes the case for long-term bullish positions in gold. However these are the December options, so I don't see the need to project that far.
Posted by David at 8/31/2007 10:42:00 AM