An interesting point that Raul Pal made on RealVision Friday is that asset managers finish their annual performance in Q4 and start building a new number from scratch in Q1. With US stock markets all at all-time highs, they often take profits around February or March and then scramble to find the next trend that can get the year’s gains rolling. Point is, just another reason to be cautious right now.
I’ll start with Crypto because I’ve been doing a lot of thinking on how to continue playing the space. Here’s a 3-month chart:
I really had no interest in Crypto assets until last summer, and started a Coinbase account around August (you can see my posts around then if you’re interested in why). First I started with buys in Bitcoin and then with Etherium with a simple separate from my portfolio and hodl idea – ultimately getting to a peak of 1 Bitcoin and 10 Ether. Late December after Ripple crashed, I bought some and it jumped 30% overnight – which reminded me of a time losing money after a dead-cat bounce in penny stocks back in the mid 2000’s. I dumped XRP and then downsized my BTC and Ether to take out my initial buy-in at the end of the year.
I dumped the rest of my Ether when it hit $1200 – partly because it went so far so fast and partly because it was getting near its all-time high (around $1400) which is typically a strong zone of resistance.
With Bitcoin, the momentum and story are so strong (a lot of money squeezing into a relatively illiquid asset) that I didn’t want to dump it, but I didn’t want to risk too much either. The idea I came up with is to keep a constant dollar-value of around $20k – so I’ve been selling off at every significant rise. If theres a big dip, I can buy back to hit around $20k and feel comfortable because I know I sold higher … but this hasn’t occured yet for me.
Back to the rest of my portfolio. I’ll start by laying out my allocations.
- MAIN POSITIONS
- 30.8% Gold Miners (FNV, GOLD, NEM & WPM), Shares
- 16.4% EQX (gold miner), Shares
- 2.8% SLV (silver), Shares
- 20.3% Gold Miners, Calls
- 10.9% SLV, Calls
- 2.7% SAND (gold), Calls
- 2.2% PVG (gold), Calls
- 4.2% TLT (long 20+ year US treasuries), Calls
- 8.5% IWM (russell 2000), Puts
- 1.3% EEM (emerging markets), Puts
It’s been a very active trading week for me, partly because I had all the gains from Crypto to re-invest. Gold dumped a bit on Wednesday, so I decided to increase my stake. I saw that even though GDX went down significantly, NEM was still rising – which seemed a very bullish sign so I got more exposure there. I also went significantly longer in TLT calls this week.
My thinking on precious metals:
As you can see I’ve been very bullish on gold miners and silver. I’ve been into gold ever since 2008 – and I rode it on past the peak and through the downside. It didn’t matter much at the time because I spent nearly all my savings on an MBA and then struggled through a lousy job market, so I really didn’t have much to lose. Today I strongly believe we’re in the mid stages of a long-term bull market in precious metals, but I know from experience that corrections go on longer than you think and much patience is required in this particular asset class. Recently (starting November), I started moving into call options for leverage and all of them expire Jan 2023.
My biggest positions are merely the top 4 holdings of GDX. I figure that GDX is the most obvious liquid play in precious metals, and most of the money will be allocated to the top 4, and that these top 4 are most likely candidates for big institutional interest, like with Berkshire’s previous dip into Barrick (GOLD). For the smaller ones, I really think you need to trust the leadership so I’m mainly in Ross Beaty’s fund. SAND was a gold streamer I was interested in back in 2010 and I figured it would be well levered to Gold’s rise, and PVG just sounded interesting so I bought a few calls.
My thinking on hedges:
The biggest danger I see with precious metals is a March-style risk-off event which would cause everything to sell off. That is where my hedges come in. They have been losing money of course, but I really like the idea that I would have significant money to invest at a time when everything is selling off.
EEM: I started hedging here back around June because I liked Rauol Pal’s idea about the demand drop from the pandemic causing dollar shortages in emerging markets. Their heavy exposure to Chinese tech companies didn’t bother me because of their relatively high valuations at a time combined with a significant chance of US sanctions. I stopped adding here around August because it seemed to be going terribly wrong – but all the puts are dated Jan 2022 so I’m just holding them for now.
IWM: I started hedging here around June as well, selling off all of my Aug 2020 and Jan 2021 SPY puts which had been going horribly wrong (I lost less than 50% which is why I like long-dated puts). After listening to Mike Green talk about passive investing, I decided that I really didn’t want to bet against the tide of a never-ending passive bid, so I’d stay short the smaller companies instead … they’re more likely to have insolvency issues than SPY anyway. After these started working against me, I decided to only buy one put for every 100 point rise in the russell and then moved that out to every 150 point rise.
TLT: In a March-style liquidity event, everything sells off including bonds. Then the federal reserve comes in with big purchases of the only things they are allowed to purchase and treasuries skyrocket. Look at the behaviour of TLT in March and you’ll see what I mean, and why I consider this an effective hedge. However, this isn’t the entire reason I’m into the space.
Back around early November, Rauol Pal mentioned something about a decent play in March TLT calls and Steven Van Metre. I started following twitter @MetreSteven and his Youtube channel The Market Says a Blue Wave of Inflation is Coming! – YouTube
You should really look at what Steven is saying if you’re interested in this space, but what catches me is the idea of massive speculative short positions in US long bonds, building up like a coiled spring since August while the Federal Reserve is actively buying every month. This could lead to a big short squeeze and it acts as a hedge in case of a major risk-off event. I started getting into this with a couple March 2021 calls back in November, then started going out the time curve with each batch I added – June, August, January, etc.
How I think about options in general:
Options have intrinsic value plus duration/risk value. I like to stick with something that seems to have a good shot at positive intrinsic value, which means I generally buy in-the-money options. I find this an interesting part in the curve because if the trades go my way, the intrinsic value is rising dollar-for-dollar with the stock. Consider this:
- You have 1 call option with giving you the right to buy 100 shares at $20, the stock moves from $21 to $22, intrinsic value went up $100. Your gain went up a bit less because of the lower risk premium, but that intrinsic value puts in a solid floor which starts to make the slope of gains increase closer and closer to a dollar-for-dollar level.
- When you are out-of-the money and it trades against you, intrinsic value is still zero but duration/risk doesn’t go away. The dollar value of the option tends to go down at a shallower slope, which is closer to a $0.50 loss per dollar decline.
Look at any options table, especially for longer durations, and you’ll see what I mean. The reason that the slope of losses shallows out is because the option has value until it expires, and anyone looking to hedge outside risk would easily take double the put options to go a bit further out of the money. The pricing makes sense if you think about it, but I really like to be in the sweet spot of the curve where I capture more of the money from a 20% gain and lose less of it from a 20% loss.
As for duration, I often look at the difference month to month and pick one that seems like it has a good chance of hitting a positive intrinsic value. For TLT, I see a test of the 165 resistance level as a fairly likely outcome so I like to make sure that my strike + premium is significantly less than that. For example, Jan 2022 150 strike, cost of $10/share, so my intrinsic value covers my entire cost if TLT hits $160. I really don’t like to hold options when they get too much less than 3 months because the duration/risk value starts to drop fairly quickly.
On the flip side, when options seem crazy expensive I like to covered calls around 1-month because they still have significant value but can quickly decline to zero. For example, I wanted to go long CWH around late October but the options were really expensive – it was trading at just over $28 and 1-month 30-strike calls were selling for $3.40 (perhaps because it was over the election). I jumped right in with 600 shares, sold the covered calls, and ended up with a solid 20% gain in one month
I am really nervous about a market correction – and I admit I have been for a while. I think of the crazy Dave Portnoy’s sign “stocks only go up” and picture my own sign “gold is in a bull market.” Gold has been extremely strong in January in past years, and I’m thinking of de-levering my portfolio at the end of the month if I get that up-move I’m looking for. I would do this the same way I did after June – by selling off all of my call options, buying the underlying shares, and then beginning to sell covered calls on them. Still, the idea of a big risk-off event in February/March haunts me a bit especially with my aggressive position in calls right now, so I am very likely to add to my hedges in the near term … particularly long TLT because I really like that story. Good luck and happy trading!