AGQ ProShares Ultra Silver ETF Revisited Part 2

Breadcrumbs: Home » Covered Calls » AGQ ProShares Ultra Silver ETF Revisited Part 2

In Part One of this article on AGQ ProShares Ultra Silver ETF I discussed the problems being faced and how I would approach the problem. Let’s look at each of the three questions to see how they should be answered.

AGQ ProShares ETF GOAL – Question 1

A) What is the GOAL of this trade. The first question is the most telling. It is obvious from Dan jumping in and buying stock in June when it looked like AGQ ProShares might break out that Dan is bullish on silver. It is also obvious that Dan does not want to miss out on what he expects will be a run up in silver prices. Dan’s goal is to profit from the run-up in silver prices.

Therefore Dan needs to pick a strategy for the run up in silver prices. He should not be concerned with trying to raise small amounts of capital through Put Selling since he believes silver at some point is going to explode.

If Dan ends up using a strategy that cannot benefit from a run up in silver he will continue to get caught with in the money covered calls, or low-income producing sold puts while AGQ ProShares runs higher without him.

Since Dan is obviously worried that he is going to miss out on any run in silver prices, he must stay with a strategy that can benefit from what Dan believes is going to happen to silver.

Profiting From The Goal – Choose The Strategy – Question 2

B) Decide how you are going to profit from your goal and what strategy to use. The second question is now easier to answer. Since it is obvious that Dan is worried about missing out on any increase in the price of silver and therefore a rise in AGQ valuation, he must choose a strategy that will allow him to profit from a rise in silver prices and provide a bit of income as well while waiting for silver to rise and push AGQ ProShares valuations higher.

Nothing runs straight up. Silver is not going to go from $10 to $500 overnight. This does not happen. Instead there will be quick run-ups, then pullbacks and then more run-ups. That is the nature of stocks and of commodity prices. This means Dan must select a strategy that can allow him to profit all the way as silver rises. It also means that Dan will have to give up some profits in return for holding shares in AGQ that may take time to appreciate in value. It is a trade-off.

If Dan wants nothing but income instead of capital gain in AGQ, then he can pick a strategy that provides income. But a strategy designed to provide primarily income, will not allow him to enjoy the spikes in valuation in AGQ ProShares stock itself. You cannot have it both ways.

if on the other hand the trade-off is some income and some profit, then that certainly is doable.

To answer question 2 then, Dan must select a strategy that suits his goals. It is obvious that Dan wants in on what he believes will be a dramatic rise in the value of silver. Therefore he must pick a strategy the is designed to do just that.

Consistency Of Strategy Being Used – Question 3

C) Be consistent and try to keep emotion out of the trade as much as you can. Now that Dan knows his goal, and has picked a strategy to meet that goal, he must apply that strategy consistently to profit to the fullest extent available, to maximize his profit or his capital gain.

While no trader can take emotion completely out of a trade, he can control it by having in place the answers to questions one and two. By knowing the goal and the strategy to meet that goal, the investor can remain consistent no matter what happens to AGQ Proshares and the price of silver.

Investment Mistakes Reviewed

Let’s look at some of the mistakes made and how they could have been corrected in Dan’s AGQ ProShares Ultra Silver ETF trades.

When Dan first wrote me in Feb his cost basis was down to $75.00 in AGQ on 4500 shares and he was holding 45 March covered calls at the $90 strike. When he wrote me later, he had sold his 4500 shares for a loss and turned to Put Selling.

Instead, consider for a moment if Dan had followed the staggered covered calls strategy and not sold his shares for a loss. When Dan wrote me he could have bought back his 45 March $90 covered calls for around .60 cents. He could then have created a staggered covered call strategy which would have spread his calls from January 2013 at $90 to April 2012 at perhaps the $50.00 strike. On April 20th when April options expired the stock closed at $51.92. Dan could have bought and rolled these covered calls out into July at $50.00 for $7.00.  Meanwhile all remaining covered calls to August would have expired out of the money and Dan would have reduced his cost in his position from $75.00 to $63.00 and still be working it lower.

AGQ ProShares Ultra Silver ETF Covered calls

A staggered covered calls strategy in AGQ ProShares Ultra Silver ETF would have worked nicely so far this year.

The staggered covered calls approach would have worked but it would have kept Dan from profiting from any run back up in AGQ ProShares Ultra Silver ETF beyond $90.00 which would have been the January 2013 covered call strike and the highest strike sold.

Consider If Silver Had Run up This Summer Beyond $90.00

Instead of falling, suppose silver had run-up this past summer to beyond $90.00. All the way higher Dan would have been exercised from his AGQ ProShares each month as the price of silver rose. Dan could have bought back into AGQ and continued to sell covered calls higher each time a group of covered calls was exercised. He would have quickly made his lost capital back and returned to a profit position as AGQ rose higher.

But this staggered covered calls approach would only work if consistently applied.

What Kind Of Investor

You need to reflect on your goal when investing through options. You need to know what kind of investor you are if using options. In Dan’s case his worry is not enjoying a rise in AGQ valuations which was his original reason for buying shares in the first place. This would mean a strategy that must keep some of the shares completely free from any possible exercise. That would be the Gambler Strategy. A strategy that brings in income, but always leaves some shares free of covered calls so they can be used to rescue any shares caught in the money and pull them higher out of the money to benefit from a rise in AGQ ProShares stock.

Knowing the type of investor you are makes it simple to pick proper strategy and stay with them consistently. Every day I get emails from investors who are not planning their strategies. They are not thinking through the trade from beginning to end whether it is 1 naked put for 100 naked puts.

Put Selling AGQ ProShares

When Dan sold his original shares for a loss and turned to Put Selling, he could have set up a simple Put Selling strategy that took into account his bullishness for silver. By not taking an “all or none approach”, when investing, Dan would never have bought stocks on June 6 when it looked like AGQ ProShares Ultra Silver ETF was going to break out along with the price of silver. Instead I explained to Dan that an investor friend who was Put Selling AGQ had sold puts the very day that Dan had bought stock. This is because my friend’s strategy is Put Selling and nothing will dissuade him from that strategy. He is consistent in applying his Put Selling strategy.

But because Dan believes silver is going to breakout and run higher, he jumped in and bought 4000 shares of stock. Instead consider what my friend is presently holding and has been doing since the start of the year.

Put Selling AGQ ProShares

Every time there has been a dip in AGQ ProShares he has been Put Selling against AGQ. He does only 5 contracts at a time.

AGQ ProShares Ultra Silver ETF Put Selling

Days with arrows are Put Selling days in AGQ ProShares Ultra Silver ETF

Every time the stock rises, he has bought back his sold puts in AGQ ProShares. Each rise then is buying to close and each dip Put Selling. Therefore on June 6 while Dan bought stock this investor was Put Selling.

AGQ ProShares Buying To Close

Each arrow marks a day there has been buying to close naked puts

With his rolling of put options, his AGQ ProShares Put Selling trades since the start of the year have generated $95,250 and here is what he is presently holding.

5 Naked Puts Oct $53

5 Naked Puts December $52

5 Naked Puts Jan 2013 $62.00

5 naked Puts Jan 2013 $60.00

5 naked Puts March 2013 $47.00

All other positions have been closed. He has used a total of $325,000 in capital and generated 29% on his capital so far this year. Of his total capital $137,000 is presently tied to covered calls positions. You can tell from the charts above that this investor has sold puts and bought them back often this year. He is taking his earnings from the trades and putting them back into AGQ ProShares Put Selling positions. He sells small positions, take his time, only sells on dips and buys back positions on rises in the stock.

This investor has no idea where the stock is headed or how quickly it may rise. He also doesn’t care. He is focused on his Put Selling and roll options strategy.

Considering Your Goals

Dan would never have sold 40 covered calls and tied up all his shares in AGQ ProShares if he had thought that AGQ would recover and push higher leaving his covered calls in the money. But this is why considering your goals is so important. If Dan believes silver is going to rise, and his goal is to benefit from that rise through higher appreciations of his shares, he must select a strategy that keeps at least some of his shares unencumbered by covered calls. That way the unencumbered shares can be used to rescue those shares caught in the money so he can have more shares benefit from the rise in stock value.

Sometimes though it is best just to hold the stock. If you are concerned that the stock is going to run higher than buying stock and using a stop-loss may be the best solution. It allows you to enjoy profits if the stock runs up and to close your positions for a profit if the stock should tumble lower.

AGQ ProShares Revisited Summary

Often an investor is better to take a different approach and set up a strategy they are comfortable using and which suits their overall belief. Part of the trouble Dan is experiencing is being caused by using too many strategies and not refining any of them. By setting the goal you actually have in mind, picking a strategy you understand which can be applied to the trade and then staying consistently with that strategy you minimize losses and can earn substantial profits while leaving most emotions out of the trade. You are no longer flipping back and forth among strategies as you try in vain to figure out which strategy to use.

Instead focus on the goal and then pick the strategy. When an investor takes the steps backwards and picks a strategy first, they often decide that their goal is to basically “make money” which is not really a goal but simply an end unto itself.

Instead by forgetting “making money” as the primary goal, an investor is free to focus on a proper strategy which will in the end “make money” anyways as long as the investor understands their goal completely.

I do believe this is Dan’s problem. He appears perplexed by both the constant changes in the share valuation of AGQ ProShares and what his real goal is. While he seems to believe in the rise in the value of silver, he also seems determined to somehow make money by different options strategies while waiting for the rise to actually happen.

But by employing the wrong strategies he locks in his shares so that when a breakout in silver prices seems imminent, he stumbles as he tries to figure out how to benefit from a break out which may or may not be on the verge of happening. By stumbling he is often reducing his chances of gains rather than improving them.

Once he accepts that his goal is to enjoy price appreciation in AGQ ProShares as silver rises, he can then decide on a strategy that benefits from that goal and allows him to stop worrying that he will miss out on any big gains in silver and subsequently AGQ ProShares values. Personally I like The Gambler Covered Calls strategy simply because it leaves some shares open for price appreciation while keeping others shares locked to covered calls to generate short-term income.

Once Dan decides on his goal, he may find that the best strategy to enjoy price appreciation in AGQ ProShares Ultra Silver ETF stock does not include options trading strategies at all.

The three steps outlined in this article will assist any investor in making better decisions which ultimate leads to more consistently winning trades.

Back To Part One Of AGQ ProShares ETF Revisited