Regular readers may remember my AGQ ProShares articles from last Feb 2012. If not you can re-read them through this AGQ ProShares Link. I was contacted by a reader, Dan who was having a bit of trouble with his AGQ ProShares stock. He had bought 4500 shares and had an average cost of $90.00. Through selling options Dan had worked his cost basis to around $75. Dan is quite the silver enthusiast and is convinced on the impending rise of silver at some point in the future. In February when Dan contacted me, he was looking for silver to be between $150 to $300 an ounce sometimes in the future which would put AGQ ProShares ETF around $500. Basically Dan’s investment would be worth 2.2 million if silver got that high. I presented to readers a number of strategies that could be used. You can read those through this AGQ ProShares Ultra Silver link. From my articles for Dan I developed the 4 Investment Strategies For Ultra ETFS PDF article which is a paid article available in my store. Each of the 4 strategies in the PDF article are designed to be used for Ultra ETFs, not just silver ETFs. They can also be adjusted for use on stocks and indeed as I have explained in previous articles, I use the shark strategy which is described in the PDF article for everything from trading the IWM ETF to trading the SPY and the VIX.

Recently Dan contacted me again regarding his positions in AGQ ProShares Ultra Silver ETF.

Dan Remains Bullish On Silver And AGQ ProShares ETF

Dan is still very bullish on silver, however sometime after contacting me in February 2012, Dan decided to sell his shares of AGQ ProShares ETF for an undisclosed loss and decided to try some Put Selling. Then on June 6 when silver looked liked it was going to break out, Dan jumped in and bought 4000 shares at $45.00. When the breakout did not happen but the stock pulled back a few days later, Dan sold covered calls for September at $44 for $1.15. Dan contacted me after all this occurred wondering if I had a strategy to rescue the calls as it looked again like AGQ ProShares ETF was going to break out and leave his September $44 calls in the money. Here is part of the e-mail question from Dan.

Dan’s Question on AGQ ProShares Ultra Silver ETF

August 22 2012: Silver finally appears to be breaking out. I currently hold (40) several September 44 calls which are covered by my shares. I sold the calls for $1.15 on August 8 when AGQ was at about $39. I don’t want the shares to be called away so I’m going to roll forward to October or December. November are not currently listed. I also have naked puts, 5 Sept 33(80% profit) and 5 October 34(60% profit).  Any suggestions on the month or strikes I might consider.

The Problem With Using A Trading Options Strategy

In the ensuing emails back and forth, Dan indicated that he had not had much luck with the strategies I had suggested and had also not have much luck with the PDF article I had written for him on the 4 Strategies of The Gambler, The Cry Baby, The Twin Sister and The Shark Trading Options Strategy. These are from the PDF article in my store.

I thought it would be valuable to readers to revisit the AGQ ProShares Ultra Silver ETF trade that Dan is doing to explain why strategies fail for investors. This article is not a criticism about Dan. I wrote this article so that other investors can learn how to apply strategies to be successful. When I was being mentored I often felt that my mentor was complaining about my ability as an investor and I resented it. Then one day my mentor saw that I was getting upset over what I thought were his complaints. He told me how did I expect to become a better investor if I could not take criticism for what it was. He told me that “I should take apart the strategy and adjust it to find out what is working and what is not”. A light went on in my head and I have never looked back. So please do not take this article as a complaint or criticism. It is far from it. It is a chance to understand why investing and option strategies fail.

Why Investing and Option Strategies Fail

When I first received Dan’s most recent emails advising me that he had bought 4000 shares of AGQ ProShares ETF when it looked like silver was going to break out, it occurred to me that buying at the top of the Upper Bollinger Band was not in any of the strategies I had laid out. But it was also not in any of Dan’s strategies either. He had bought AGQ ProShares ETF shares on the belief that silver was going to break out.

Below is the one year chart on AGQ ProShares. You can see the June 6 jump which turned out to be a false breakout. I have included a couple of other aspects to the AGQ ProShares Ultra Silver ETF chart I want to mention. Dan contacted me on August 22 and you can see the most recent activity in the shares as it looks again like AGQ ProShares may be trying to break out once again. If you look at the Ultimate Oscillator you can see that it is extremely overbought. I included the Ultimate Oscillator to explain why it is of NO value for AGQ ProShares.

A timing tool like the Ultimate Oscillator is worthless for a commodity based ETF for timing entry and exit positions. Commodity based ETFs do nothing but follow the movement in the underlying commodity. Therefore using the Ultimate Oscillator to look for a break out in the price of silver is pointless to say the least. The Ultimate Oscillator can only advise us that a lot of investors feel that silver is about to break out. Using a timing tool like the Ultimate Oscillator in a commodity ETF is not the same as in a stock such as Intel Stock for example. In stocks the Ultimate Oscillator can advise when there is too much enthusiasm in a stock and buyers are outnumbering sellers by a wide margin. In a commodity ETF it cannot be used for the same purpose.

AGQ ProShares Ultra Silver ETF 1 year chart

This is the one year AGQ ProShares Ultra Silver ETF chart.

AGQ ProShares Ultra Silver ETF 3 Month Chart

Below is the 3 month chart of AGQ ProShares. When Dan bought his AGQ Shares it was pushing the Upper Bollinger Band and when he sold his covered calls, a few days later AGQ had pulled back. If you read through all the strategies I presented through the links below you will see that none of the strategies mentioned talked about selling puts and then jumping in, buying stock on what looks like a breakout and then when the breakout a few days later looks like it might not happen, sell covered calls.

The strategies I discussed were Staying Simple, Staggered Covered Calls, Go That Extra Mile, Gambler Covered Calls, Cry Baby Stock Trading, Twin Sister Put Selling and The Shark Option Trading.  The links to the strategies are contained in part 2 and part 3 below.

Read AGQ ProShares Ultra Silver Investing Strategies Part 1
Read AGQ ProShares Ultra Silver Investing Strategies Part 2
Read AGQ ProShares Ultra Silver Investing Strategies Part 3

So what is noticeable with Dan’s trading now and why is he needing some help?

AGQ ProShares ETF 3 month chart

AGQ ProShares Ultra Silver ETF 3 Month Chart June to August 2012

No Consistency In Investment Strategy

If you look at what Dan has been doing you can see there is no consistency in the strategy or strategies being employed. When Dan said he had not had much success with the 4 Investment Strategies for Ultra ETFs, you can see that none of the strategies are being used. Dan wrote me in February when his cost basis was $75.00. Later he sold for a loss, then started Put Selling, then jumped into buying shares in June on what looked like a breakout, then sold covered calls on all his stock when it looked like the breakout might not happen. He now holds 10 naked put contracts and September $44 covered calls on all his AGQ ProShares Ultra Silver ETF shares.

Do you see a strategy here?

So what is wrong and why is Dan having so much trouble.

If I was mentoring Dan one on one and he was in the room with me I would tell him, to:

A) Decide what is your goal for this trade.

B) Decide how you are going to profit from your goal and what strategy to use.

C) Be consistent and try to keep emotion out of the trade as much as you can.

By stepping back from the AGQ ProShares Ultra Silver ETF trades, studying what is going on and then answering the above three questions an investor could solve most of the problems.

In Part 2 I will look at what I think is wrong and what can be done to fix this common investing problem.

Read AGQ ProShares Ultra Silver ETF Part 2