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.
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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