With the New Year getting older we can measure up some of the most profitable financial strategies of 2016.
A weak U.S. Dollar has supported the beaten and battered resource and commodities markets. Lack of confidence in the Federal Reserve’s action to raise rates, and less frequently than thought, has led to a greenback slide to multi-month low levels.
Historic Dollar strength crushed materials to the tune of 50% plus losses. A relief rally ensued as Yellen has exercised caution in her monetary policy.
Gold was the first to turn higher as 2016 began, followed by Copper, Coal, Oil, Aluminum, Natural Gas, Steel and Silver. Metals, Miners, and Energy have been the big winners in these early months.
The commodity crash had halted with an overdone downside ready to rally.
A simple stock substitution strategy saw triple digit plus payoffs as the underlying bounced 10%-30% off the bottom. The leveraging power of options (its limited risk with less capital required than purchasing shares) produced solid returns.
My Profitable Option Strategy of 2016
A deep in-the-money call option acts much like the stock at a much lower cost. Buying three to six months of time widens the opportunity window to ride through ups and downs.
Two rules are necessary to profit from a deep in-the-money call option:
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Take a look at the example below where a February exit made money in the worst of times for the equities market.
TAKE GOLDEN GAINS February 11th
- Bought Call Option for $325 when GDX was at $13.75 on January 26th.
- Sold GDX June $11 Call for $7.00 or better for 110% plus profit in less than three weeks on February 11th.
The power of options produced a major profit on a modest move from $14 to $18 in GDX.
