Talk me out of it!

[AdamA]

Thinking of buying Jan 2015 at the money call options for the junior miners (GDXJ).

They're selling for around $255.

The plan would be to hold them for a year and then sell them and either take profits or tax loss harvest, hopefully the former.

Talk me in or out of this.

[murphy_p_t]

don't junior miners have enough leverage?

[AdamA]

don't junior miners have enough leverage?

Yes, if you're wrong.

No, if you're right.

[sk55]

>Thinking of buying Jan 2015 at the money call options for the junior miners (GDXJ).

the implied volatility on those are near 50%...

the volatility effect is higher on LEAPs, so if volatility drops you could get crushed.

your  prob better off with a leveraged 2x-3x miner fund

from my paper trades on spy, its better to buy leaps when volatility is low

[Wonk]

its better to buy leaps when volatility is low

Second this.  You're paying a steep price for the volatility.  If you put this trade on, think of it as a lottery ticket with better odds.

[Ad Orientem]

[AdamA]

If you put this trade on, think of it as a lottery ticket with better odds.

That's exactly how I think of it.  It's a total gamble, but for around $2500 you can buy 10 contracts.

Worst case, you lose it all, and pay to play again next year.

If you believe that this sector is going to take off in the next few years, it might be a gamble worth taking. 

Of course, if you're wrong, you're basically flushing money down the toilet every year, and I could totally envision myself doing something silly like this for three years without success, deciding it won't work, quitting, and then being all mad year #4 when it finally catches fire.   

[AdamA]

[MediumTex]

If you put this trade on, think of it as a lottery ticket with better odds.

That's exactly how I think of it.  It's a total gamble, but for around $2500 you can buy 10 contracts.

Worst case, you lose it all, and pay to play again next year.

If you believe that this sector is going to take off in the next few years, it might be a gamble worth taking. 

Of course, if you're wrong, you're basically flushing money down the toilet every year, and I could totally envision myself doing something silly like this for three years without success, deciding it won't work, quitting, and then being all mad year #4 when it finally catches fire. 

So your maximum loss would be $2,500?

That doesn't sound like a bad bet, assuming you can lose the $2,500 without it hurting you or your overall investments.

I like the risk/benefit profile of the trade, though.

Believe it or not, I think that the main risk with that trade would potentially be the wasted time over the next 12 months you would spend watching the markets more closely (if you're into that sort of thing).

A while back I set up a separate brokerage account at another broker and bought a small amount of SIRI back when it was .75 a share.  I was able to forget about it and now rarely think about it at all.  Since I bought it it has more than quadrupled, which was a happy outcome for me, but I still don't think about it.  I'll bet I haven't spent more than a couple of hours thinking about that investment in the 2-3 years since I made it.  To me, that's the definition of a good trade--it was profitable (so far, anyway) and I didn't waste a lot of time or mental energy on it.

My mom has a box of junk silver coins that she got together back in the 60s when they were still there for anyone who wanted them.  Even though silver has been incredibly volatile in the almost 50 years since she collected the coins, I doubt if she has even thought about it as much as I have thought about my SIRI investment.  No taxes, no expenses, no recordkeeping, just a heavy box in the closet.  I love that.  Volatile asset, but zero stress.

[AdamA]

Believe it or not, I think that the main risk with that trade would potentially be the wasted time over the next 12 months you would spend watching the markets more closely (if you're into that sort of thing).

I actually kind of enjoy watching it, good or bad (as long as there's not too much at stake). 

At the beginning of the year, I set up a LEAPS PP, like we had discussed a while back in another thread (with a small amount of money).  It's extremely fun to watch these positions.  The volatility is insane.  So, I look at this every day...sometimes I take screen shots and send them to friends.    It's a hobby that mostly satisfies my apparent need to gamble (without doing too much damage). 

[murphy_p_t]

what would the $2500 turn into if GDXJ goes back to $20 or $30?

[AdamA]

what would the $2500 turn into if GDXJ goes back to $20 or $30?

The break even price for a Jan 15 2015 GDXJ Call is 12.30 ($10 strike price plus $2.30 for the option).

So if you hold to expiration and the stock price goes to $20, you'd make $770 per contract ($20 - $12.30), which would be $7700 for ten.  Plus $2500 is $10200. 

At $30 it would be $20200. 

The thing is, although I do believe that the Miners will eventually come back to life, the saying, "the markets can remain irrational longer than you can remain solvent" comes to mind. 

I feel hopeful and excited when I think about buying calls on these. 

I feel nervous and nauseated when I think about buying puts.

Makes me think that the latter might be the better move.

There's many a goldbug sitting around waiting for these to take off...even with the fundamentals being what they are, I think there may still be some pain left to be felt here.  It's just a hunch, but I could see us discussing how the Juniors are at $4 this same time next year.

[MediumTex]

Three years ago gold was trading at about the same price it is trading at today.

Three years ago GDXJ was trading at over $26.00 a share.

I would say that GDXJ has probably overreacted with its 65% decline in share price compared to June 2010 price levels when you consider that the price of gold is at exactly the same level as it was then.

$1,200 gold is still very profitable to mine for many mining companies.

[AdamA]

Three years ago gold was trading at about the same price it is trading at today.

Three years ago GDXJ was trading at over $26.00 a share.

I would say that GDXJ has probably overreacted with its 65% decline in share price compared to June 2010 price levels when you consider that the price of gold is at exactly the same level as it was then.

$1,200 gold is still very profitable to mine for many mining companies.

You talked me into it.

[MediumTex]

Three years ago gold was trading at about the same price it is trading at today.

Three years ago GDXJ was trading at over $26.00 a share.

I would say that GDXJ has probably overreacted with its 65% decline in share price compared to June 2010 price levels when you consider that the price of gold is at exactly the same level as it was then.

$1,200 gold is still very profitable to mine for many mining companies.

You talked me into it.

I hope it is a profitable trade for you.

[AdamA]

I hope it is a profitable trade for you.

Thanks.  It should at least be interesting.

[AdamA]

So, I bought the $37 January 2015 call options on GDXJ on 7/2 of this year (at the money at the time I purchased them). 

They've been interesting to watch. 

They doubled in value (roughly) by mid August.

They didn't move at all during the 11% run up in the underlying ETF after the Fed's announcement last week.

They lost about 40% of their value yesterday and roughly back to the original purchase price now.

I'm planning to keep them until July of 2014. 

I think it is interesting how some of these LEAPS positions (1) don't really move in tandem with the underlying and, (2) how they tend to sit quietly for weeks and then suddenly have big moves up or down. 

#2 seems to be especially true when it comes to ETFs more so than individual securities (based on my limited experience).

[AdamA]

That could be in part due to the fact that there is very little open interest on that particular option.

That's a good point. 

It's weird to see how inconsistent the open interest is in some of these positions. The $37 is at 27.  The $40 is at 331.