Thread by @TheLastDegree

Hedging (thread). Some simple thoughts for hedging a mining portfolio.

1. In case i would need to exit on a cycle top, i need around 150 seconds for each position to sell, that would cost me at least 3 hours (70 positions)

2. Even a small 25 pick portfolio would take you 1h

3.For that reason i have a 100% junior portfolio, and another 10% add-on leveraged portfolio.

The leveraged part can be used both long & short, swapping takes 2minutes if your positions are ready in the watchlist.

For options i use IB, as i can bid on midprice.

4. Juniors trade less cyclical, but some do, mostly the Silver section and be aware min. 30% corrections are very normal

To hedge, i prefer 2 liquid instruments, with minimal spreads, so i use GDX and SLV put options.

i keep it very simple, only buying straight puts.

I avoid GLD as it is less volatile and does not offset miner losses, and avoid GDXJ as the spread is too high on put options.

It's possibelt hedge is only on for a few hours, so want to have tiny spreads.

For every 10K in miners, this is how i proceed

i often split between SLV (33%) and GDX (66%) as they both drop different and it adds flexibility to the hedge trade.

in case i would have 100% in GDX puts, i want the same exposure as total junior portfolio.

so the final result of the trade is long juniors/short seniors -slv

So with GDX trading at 36, i need 10.000 devided by 100 contracts devided by 36 = 2.77 option contracts.

if i choose sept expiry, 35 strikes, at 1.73 ask, this hedge cost me 1.73 x 100 x 2.77 = 479$ for each 10.000$, or 4.8% of the capital i need to put my portfolio to neutral

as my entries are often perfect (on a backtest of the breakdown) - my aim as a goldbull is to have the neutral hedge in play, and then go to sleep.

We almost always have a 2nd drop, that is when i aim to put a flat stop. From there, nothing to do than to wait & have a drink.

Or I get stopped out.

Great, the bull continues, zero cost (apart from the broker) , but i was protected also for a 30% drop.

Or we drop, then i let it ride to a 38.2 fib retrace of the whole move since the last bottom.

I don't try to catch the very last part of the drop, as we often have a double bottom, small undercut etc... where the volatility of the put option will quickly fade, so the premium falls.

This is just a first intro, to show it is possible to hedge without losing $

Do note i have around 10% capital available for this pair trade.

So when i am saying i am hedging: i lied

i am often net short at that time waiting for a deeper drop.

never want to upset a goldbug😉