What God's Telling Option Traders
By Jeff Clark
November 11, 2008

It's Question & Answer time again. Below are a couple worthwhile questions that have come across my desk in the past few weeks...

Dear Jeff: I lost my a** trading options in October. How can I make sure I don't lose it again?

The surest way to prevent losing your backside is to not put it on the line in the first place. Many people look at option trading as a fast path to riches – a way to double or triple your net worth overnight. So they put way too much money into their option trades and they violate God's eleventh commandment...

"Risk not thy whole wad."

Option trading is best used as a way to add a little juice to an otherwise conservative portfolio. Dedicate a small portion of your portfolio – say 10% – to option trading and then lock the rest of your money up in solid, low-risk investment ideas. This way, even if you lose the 10% you've dedicated to trading options, you'll make up a good portion of that loss on your conservative investments. And if you do well trading options, then you'll still be able to boost your overall portfolio performance dramatically.

This is how I manage my own money. And it's the best strategy I know of to consistently generate positive returns without losing one's "a**."

Jeff: A few weeks ago, you were wildly bullish on gold and gold stocks. They've since dropped sharply and recovered a bit. What are your current thoughts on this sector?

You must own gold or silver. When central banks around the globe are printing money faster than Danielle Steel prints romance novels, your only hedge is to own gold or silver. I underestimated the need for liquidity, which caused institutions and investors to dump everything – including precious metals – in an effort to raise cash. But their selling does not negate the logic behind this trade.

We could see additional selling pressure over the next week or two if the broad stock market takes a hit. But the current economic environment is hugely bullish for precious metals. And precious-metal stocks offer dramatic leverage on this trade.

I'm not a typical gold bug who thinks gold can only go higher and if it doesn't then it's some sort of government conspiracy. I've often written bearish articles on gold when the price has extended further than logic dictates.

The current economic environment, however, is bullish for gold and silver. The short term is up for grabs, but I can't imagine a better trading idea for the intermediate and long term.

Hi Jeff: I love the new real-time blog feature you've added to the S&A Short Report. Oftentimes, though, you mention "scalping trades." Can you please explain what you mean by that?

A "scalp" trade is simply an attempt to take advantage of a short-term move in the market. We'll quickly trade a position for a few nickels or dimes and "scalp" a small profit.

A New Bull Market Begins in Four Months Somebody Has to Sell at the Bottom

For example, yesterday morning – when the S&P 500 gapped higher to about 950 – I told my S&A Short Report subscribers that the rally would probably not hold and the major averages would likely come back to at least unchanged on the day. Aggressive traders could have shorted SPY (the S&P 500 index ETF) above 95 on the opening and then covered the trade when the rally attempt failed. Scalp traders could have pocketed anywhere from 1%-3% in just a few hours.

Frankly, I prefer to hold trades a bit longer than that. But you have to take what the market is willing to give. And right now, the market is only offering scalping opportunities. I suspect we'll soon get the chance to position trade for a longer time frame. Right now, though, scalping trades is the best strategy.

Best regards and good trading,

Jeff Clark

P.S. Send any thoughts on the eleventh commandment and your trading questions here.

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