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Staying off the Hook in the Gold Market

By Jeff Clark
Thursday, November 16, 2006

“Play it!” my guide shouted at me as I struggled to land an 18-inch brown trout.
 
To a fly fisherman, the phrase “play it” means to reel the fish in a bit, and then let it go... reel it in a bit more, and then let it go again. This process tires the fish out and makes it easier to land the fish without risk of snapping the line.
 
And it’s kind of fun – at least for the fisherman. The fish, I suspect, feels differently.
 
Now, after the recent action in the gold market, I know how the fish feels.
 
Two weeks ago, I turned cautious on gold. I wrote about it in the November 3 issue of GSW. Last Tuesday, for my S&A Short Report subscribers, I recommended a specific put option trade on a gold stock.
 
To me, the trade looked as juicy as a fat June bug looks to a trout. So I snapped at it. And on Wednesday, as gold dropped $9 per ounce and the puts jumped to an immediate 30% profit, I was happy.
 
Then – it set the hook.
 
On Thursday, gold rallied over $18 per ounce, and my 30% profit turned into a 20% loss. I was on the line and being reeled in. On Friday, the line slackened. Gold dropped $8 per ounce, and the puts shot back up to a small profit.
 
So the question became, “Do I spit out the June bug and break even on the trade... or do I race downstream and try to snap the line in pursuit of bigger profits?”
 
I raced downstream.
 
And on Monday, it reeled me in again.
 
The game continued yesterday when gold and gold stocks opened lower and then turned around and closed higher.
 
I know I’m being played. But, despite feeling like I’m “on the hook,” I’m sticking with the trade because I know it’s a game of catch and release. And that’s why it’s important to keep the position size small.
 
You see, trading smaller positions allows you to snap at a June bug without the risk of being filleted and fried. Even if you end up getting caught on a hook, a small losing trade doesn’t destroy your portfolio. And that gives you the confidence to hold the position a little longer – and see if your original analysis plays out.
 
I’ve often argued that the real purpose of trading isn’t to get rich quick. Rather, the real purpose of trading stocks and options is to add a little extra juice to an otherwise conservatively constructed portfolio.
 
By keeping your position limits small, you can add that extra juice without the risk of becoming someone’s dinner.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1228.28 +0.4% +12.5%
Oil 37.96 +0.4% +3.0%
Gold 134.79 -1.3% +21.5%
Silver 27.70 -1.4% +60.1%
US-Dollar 79.96 +0.4% +4.9%
Euro 1.33 0.0% -9.8%
Volatility 17.74 -1.4% -25.1%
Gold Stocks 563.51 -2.3% +27.7%
10-Year Yield 3.24 +2.5% -4.4%

World ETFs
Symbol Price
Change
52-Wk
USA 123.28 +0.4% +12.5%
Canada 30.21 -0.7% +18.9%
Russia 21.85 -0.7% +21.4%
India 37.51 -1.7% +21.5%
Israel 16.84 -0.5% +12.1%
Japan 10.59 +0.3% +6.5%
Singapore 13.74 +0.6% +20.1%
Taiwan 14.81 -0.4% +19.2%
S. Korea 57.08 -0.5% +23.2%
S. Africa 71.34 +0.3% +30.5%
China 43.30 -1.6% -0.8%
Lat.America 52.25 -0.8% +9.1%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 135.21 +0.2% +21.5%
Big Pharma 64.01 -0.1% -1.9%
Internet 73.02 +0.2% +28.7%
Semis 16.43 +1.1% +28.1%
Utilities 30.87 -0.4% +0.3%
Defense 18.50 -0.3% +9.2%
Nanotech 10.10 -0.6% +1.1%
Alt. Energy 10.28 +0.8% -3.1%
Water 18.78 +0.1% +16.1%
Insurance 16.28 +0.9% +21.9%
Biotech 20.67 +0.1% +28.9%
Retail 19.49 -0.8% +27.1%
Software 24.98 +0.6% +26.4%
Big Tech 54.08 +0.4% +23.9%
Construction 13.31 +0.1% +17.8%
Media 13.80 +0.4% +23.8%
Consumer Svcs 67.39 -0.1% +24.1%
Financials 55.78 +1.5% +9.4%
Health Care 63.99 +0.2% +2.3%
Industrials 63.65 -0.2% +21.1%
Basic Mat 73.75 -1.1% +28.2%
Real Estate 54.70 -1.5% +23.3%
Transportation 91.23 -0.5% +24.8%
Telecom 22.68 0.0% +15.5%