Buy and Hedge in Action - with Gold!

by Wayne Ferbert on April 17th, 2013

We got a great email from one of our readers the other day. He had bought our book and put the strategy to work on one of his favorite investments: Gold. He was using the popular ETF that covers Gold: the GLD.
 
Here was his quote: “I bought your book and am a convert. In fact it has already saved me money on GLD where I hedged when the GLD VIX was really low (selling a 20% up call and buying a 10% down put cost around 1.5% annualized). Needless to say, today I am very relieved.”
 
I would imagine that he would be relieved after the week that Gold has had. The two day decline in gold was unbelievable – DOWN 12% in just 2 days! Because these kinds of declines are truly unforeseen, we want to be hedged.
 
THAT IS THE BASIS OF OUR WHOLE BOOK!
 
Further kudos should go to this reader’s willingness to have a collar in place that had room for 20% upside and 10% downside for an annualized cost of 1.5%. In the end, often being a Buy & Hedge investor means determining what level of ‘premium’ you want to pay for your position ‘insurance’.
 
You can structure hedges with no premium – but your downside to upside may not be the best trade-off for you. We usually recommend getting comfortable with an annual premium around 1-2% - depending on volatility.
 
I want to commend this reader for following that guideline and now reaping the benefits!


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