Options revisited: Gold fever
"Your plan already answers your own question in the best possible way: If you want to be able to make the most possible profit from a large downward move in a stock (in this case, a stock that tracks gold), with a limited, defined risk if there is an upward move, the optimal strategy is to buy a put option.  There are a few Exchange Traded Funds (ETFs) that track the price of gold.  think of them as stocks that behave like gold, essentially.  Two good examples that have options are GLD and IAU. (When you talk about gold, you'll hear a lot about futures.  Forget them, for now.  They do the same essential thing for your purposes, but introduce more complexity than you need.) The way to profit from a downward move without protection against an upward move is by shorting the stock.   Shorting stock is like the opposite of buying it.    You make the amount of money the stock goes down by, or lose the amount it goes up by.   But, since stocks can go up by an infinite amount, your possible loss is unlimited. If you want to profit on a large downward move without an unlimited loss if you're wrong and it goes up, you need something that makes money as the stock drops, but can only lose so much if it goes up.   (If you want to be guaranteed to lose nothing, your best investment option is buying US Treasuries, and you're technically still exposed to the risk that US defaults on its debt, although if you're a US resident, you'll likely have bigger problems than your portfolio in that situation.) Buying a put option has the exact asymmetrical exposure you want.   You pay a limited premium to buy it, and at expiration you essentially make the full amount that the stock has declined below the strike price, less what you paid for the option.   That last part is important - because you pay a premium for the option, if it's down just a little, you might still lose some or all of what you paid for it, which is what you give up in exchange for it limiting your maximum loss. But wait, you might say.  When I buy an option, I can lose all of my money, cant I?  Yes, you can.    Here's the key to understanding the way options limit risk as compared to the corresponding way to get ""normal"" exposure through getting long, or in your case, short, the stock: If you use the number of options that represent the number of shares you would have bought, you will have much, much less total money at risk. If you spend the same ""bag 'o cash"" on options as you would have spent on stock, you will have exposure to way more shares, and have the same amount of money at risk as if you bought the stock, but will be much more likely to lose it. The first way limits the total money at risk for a similar level of exposure; the second way gets you exposure to a much larger amount of the stock for the same money, increasing your risk. So the best answer to your described need is already in the question:   Buy a put.  I'd probably look at GLD to buy it on, simply because it's generally a little more liquid than IAU. And if you're new to options, consider the following: ""Paper trade"" first.  Either just keep track of fake buys and sells on a spreadsheet, or use one of the many online services where you can track investments - they don't know or care if they're real or not. Check out www.888options.com.  They are an excellent learning resource that isn't trying to sell you anything - their only reason to exist is to promote options education.   If you do put on a trade, don't forget that the most frustrating pitfall with buying options is this:  You can be basically right, and still lose some or all of what you invest.  This happens two ways, so think about them both before you trade: If the stock goes in the direction you think, but not enough to make back your premium, you can still lose.  So you need to make sure you know how far down the stock has to be to make back your premium.  At expiration, it's simple: You need it to be below the strike price by more than what you paid for the option. With options, timing is everything.  If the stock goes down a ton, or even to zero - free gold! - but only after your option expires, you were essentially right, but lose all your money.  So, while you don't want to buy an option that's longer than you need, since the premium is higher, if you're not sure if an expiration is long enough out, it isn't - you need the next one. EDIT to address update: (I'm not sure ""not long enough"" was the problem here, but...) If the question is just how to ensure there is a limited, defined amount you can lose (even if you want the possible loss to be much less than you can potentially make, the put strategy described already does that - if the stock you use is at $100, and you buy a put with a 100 strike for $5, you can make up to $95.   (This occurs if the stock goes to zero, meaning you could buy it for nothing, and sell it for $100, netting $95 after the $5 you paid).   But you can only lose $5. So the put strategy covers you. If the goal is to have no real risk of loss, there's no way to have any real gain above what's sometimes called the ""risk-free-rate"".  For simplicity's sake, think of that as what you'd get from US treasuries, as mentioned above. If the goal is to make money whether the stock (or gold) goes either up or down, that's possible, but note that you still have (a fairly high) risk of loss, which occurs if it fails to move either up or down by enough.  That strategy, in its most common form, is called a straddle, which basically means you buy a call and a put with the same strike price.  Using the same $100 example, you could buy the 100-strike calls for $5, and the 100-strike puts for $5.  Now you've spent $10 total, and you make money if the stock is up or down by more than $10 at expiration (over 110, or under 90).   But if it's between 90 and 100, you lose money, as one of your options will be worthless, and the other is worth less than the $10 total you paid for them both." You'll still lose a little bit if you buy a put option at the current price.  No such thing as free hedging. Let's say you have 100 shares of IAU that you bought for exactly $12.50 per share.  This is $1,250.  Now let's say you bought a put option with a strike price of $13 that expires in April 2011.  The current price for this option is $1.10 per share, or $110.  You can sell your IAU for $1,300 any time before the expiration date, but this leaves $60 in time value. The price of the options will always have a time component that is a premium on the difference between the current price and the strike price.  (Oh, forgot to add in commissions to this.) gold is incredibly volatile, I tried spreadbetting on it.  During the month of its highest gain, month beginning to month end, I was betting it would go up - and I still managed to lose money. It went down so much, that my stop loss margin would kick in.   Don't do things with gold in the short term its a very small and liquid market. My advice with gold, actually buy some physical gold as insurance. Make a portfolio with gold and put options for gold. If the price rises again, sell a part of your gold and use it to buy new put options. If the price goes down, then use your put options to sell gold at a favorable price.
"Ryan's suggestion to index for your main strategy is dead on. Your risk is highest with one given stock, and decreases as you diversify. Yet, picking the stocks one at a time is an effort, when done right, it's time consuming. For what one can say about Jim ""mad money"" Cramer, his advice to spend an hour a month studying each stock you own, is pretty decent advice.  Penny stocks are sub one dollar priced, typically small companies which in theory can grow to be large companies, but the available information tends to be tougher to get hold of.  Options are a discussion for a different thread, I discussed the covered call strategy elsewhere and show that options are not necessarily high risk, it depends how they are used." Oanda.com trades spot forex and something they call box options, it's not quite what you are looking for, but maybe worth looking up. Gold's valuation is so stratospheric right now that I wonder if negative numbers (as in, you should short it) are acceptable in the short run.  In the long run I'd say the answer is zero.  The problem with gold is that its only major fundamental value is for making jewelry and the vast majority is just being hoarded in ways that can only be justified by the Greater Fool Theory.  In the long run gold shouldn't return more than inflation because a pile of gold creates no new wealth like the capital that stocks are a claim on and doesn't allow others to create new wealth like money lent via bonds.  It's also not an important and increasingly scarce resource for wealth creation in the global economy like oil and other more useful commodities are. I've halfway-thought about taking a short position in gold, though I haven't taken any position, short or long, in gold for the following reasons: Straight up short-selling of a gold ETF is too risky for me, given its potential for unlimited losses. Some other short strategy like an inverse ETF or put options is also risky, though less so, and ties up a lot of capital.  While I strongly believe such an investment would be profitable, I think the things that will likely rise when the flight-to-safety is over and gold comes back to Earth (mainly stocks, especially in the more beaten-down sectors of the economy) will be equally profitable with less risk than taking one of these positions in gold. "A good time to invest in gold WAS about ten years ago, when it had reached a 20-year bottom around $300 an ounce. That's when I was buying (gold stocks, not physical gold). Since then, it's gone up 5-6 times in ten years. It might continue to go up of course, but it also has long way down to go, because it has come up ""too far, too fast."" I have since sold my gold stocks. Alternatives to gold include other metals such as silver and copper (which actually belong in the same chemical family) as well as platinum and palladium. But they, too, have run up a lot in price over the past ten years." "During Graham's career, gold and currency were the same thing because of the gold standard. Graham did not advise investing in currencies, only in bonds and stocks, the latter only for intelligent speculation. Graham died a couple of years after Nixon closed the gold window, ending the gold standard.  Gold may be thought of as a currency even today, as endowments and other investors use it as a store of value or for diversification of risks. However, currency or commodities investing does not seem Graham-like. How could you reliably estimate intrinsic value of a currency or commodity, so that you can have a Graham-like margin of safety after subtracting the intrinsic value from the market value?  Saying that gold is ""clearly underpriced in today's market"" is just hand-waving. A Graham analysis such as ""net net"" (valuing stocks by their current tangible assets net of all liabilities) is a quantitative analysis of accounting numbers audited by CPAs and offers a true margin of safety." Originally dollars were exchangeable for specie at any time, provided you went to a govt exchange. under Bretton Woods this was a generally fixed rate, but regardless there existed a spread on gold. This ceased to be the case in 71 when the Nixon shock broke  Bretton woods. "The difficulty with investing in mining and gold company stocks is that they are subject to the same market forces as any other stocks, although they may whether those forces better in a crisis than other stocks do because they are related to gold, which has always been a ""flight to safety"" move for investors. Some investors buy physical gold, although you don't have to take actual delivery of the metal itself.  You can leave it with the broker-dealer you buy it from, much the way you don't have your broker send you stock certificates.  That way, if you leave the gold with the broker-dealer (someone reputable, of course, like APMEX or Monex) then you can sell it quickly if you choose, just like when you want to sell a stock. If you take delivery of a security (share certificate) or commodity (gold, oil, etc.) then before you can sell it, you have to return it to broker, which takes time.  The decision has much to do with your investing objectives and willingness to absorb risk.  The reason people choose mutual funds is because their money gets spread around a basket of stocks, so if one company in the fund takes a hit it doesn't wipe out their entire investment.  If you buy gold, you run the risk (low, in my opinion) of seeing big losses if, for some reason, gold prices plummet.  You're ""all in"" on one thing, which can be risky. It's a judgment call on your part, but that's my two cents' worth." No. The value of the dollar will continue to decline, in turn adding to the value of gold. The current prices are not high for metals, although not rock bottom prices. Especially given what central banks are going to do. (QE).  We are nowhere near a gold bubble. "Buying physical gold: bad idea; you take on liquidity risk.  Putting all your money in a German bank account: bad idea; you still do not escape Euro risk.  Putting all your money in USD: bad idea; we have terrible, terrible fiscal problems here at home and they're invisible right now because we're in an election year.  The only artificially ""cheap"" thing that is well-managed in your part of the world is the Swiss Franc (CHF).  They push it down artificially, but no government has the power to fight a market forever.  They'll eventually run out of options and have to let the CHF rise in value." "If there is a very sudden and large collapse in the exchange rate then because algorithmic trades will operate very fast it is possible to determine “x” immediately after the change in exchange rate. All you need to know is the order book. You also need to assume that the algorithmic bot operates faster than all other market participants so that the order book doesn’t change except for those trades executed by the bot. The temporarily cheaper price in the weakened currency market will rise and the temporarily dearer price in the strengthened currency market will fall until the prices are related by the new exchange rate. This price is determined by the condition that the total volume of buys in the cheaper market is equal to the total volume of sells in the dearer market.   Suppose initially gold is worth $1200 on NYSE or £720 on LSE. Then suppose the exchange rate falls from r=0.6 £/$ to s=0.4 £/$.  To illustrate the answer lets assume that before the currency collapse the order book for gold on the LSE and NYSE looks like: GOLD-NYSE   Sell (100 @ $1310) Sell (100 @ $1300) <——— Sell (100 @ $1280) Sell (200 @ $1260) Sell (300 @ $1220) Sell (100 @ $1200) ————————— buy (100 @ $1190) buy (100 @ $1180)   GOLD-LSE Sell (100 @ £750) Sell (100 @ £740) ————————— buy (200 @ £720) buy (200 @ £700) buy (100 @ £600) buy (100 @ £550) buy (100 @ £530) buy (100 @ £520) <——— buy (100 @ £500)   From this hypothetical example, the automatic traders will buy up the NYSE gold and sell the LSE gold in equal volume until the price ratio ""s"" is attained. By summing up the sell volumes on the NYSE and the buy volumes on the LSE, we see that the conditions are met when the price is $1300 and £520. Note 800 units were bought and sold.   So “x” depends on the available orders in the order book. Immediately after this, however, the price of the asset will be subject to the new changes of preference by the market participants. However, the price calculated above must be the initial price, since otherwise an arbitrage opportunity would exist." You're missing the cost-of-carry aspect: The cost of carry or carrying charge is the cost of storing a physical commodity, such as grain or metals, over a period of time. The carrying charge includes insurance, storage and interest on the invested funds as well as other incidental costs. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of the funds necessary to buy the instrument. So in a nutshell, you'd have to store the gold (safely), invest your money now, i.e. you're missing out on interests the money could have earned until the futures delivery date.  Well and on top of that you need to get the gold shipped to London or wherever the agreed delivery place is. Edit: Forgot to mention that of course there are arbitrageurs that make sure the futures and spot market prices don't diverge. So the idea isn't that bad as I might have made it sound but being in the arbitrage business myself I should disclaim that profits are small and arbitraging is highly automated, so before you spot a $1 profit somewhere between any two contracts, you can be quite sure it's been taken by an arbitrageur already. I just wrote an article about this and how Im playing it (ALOT of long dated OotM (out of the money) PUT options).  Especially with the Fed forcing rate hikes (as if they think we dont understand theyre hiking only to cut rates in a few months when a recession shows) and the economys growth weakening.  I don't see a single catalyst for resuming the boom in auto sectors.  (my article) https://lonewolf.liberty.me/car-mageddon-is-upon-us-and-how-to-play-it/ "Ok, I think what you're really asking is ""how can I benefit from a collapse in the price of gold?""  :-) And that's easy. (The hard part's making that kind of call with money on the line...) The ETF GLD is entirely physical gold sitting in a bank vault. In New York, I believe. You could simply sell it short.  Alternatively, you could buy a put option on it. Even more risky, you could sell a (naked) call option on it. i.e. you receive the option premium up front, and if it expires worthless you keep the money. Of course, if gold goes up, you're on the hook. (Don't do this.)   (the ""Don't do this"" was added by Chris W. Rea. I agree that selling naked options is best avoided, but I'm not going to tell you what to do. What I should have done was make clear that your potential losses are unlimited when selling naked calls. For example, if you sold a single GLD naked call, and gold went to shoot to $1,000,000/oz, you'd be on the hook for around $10,000,000. An unrealistic example, perhaps, but one that's worth pondering to grasp the risk you'd be exposing yourself to with selling naked calls. -- Patches) Alternative ETFs that work the same, holding physical gold, are IAU and SGOL. With those the gold is stored in London and Switzerland, respectively, if I remember right.  Gold peaked around $1900 and is now back down to the $1500s. So, is the run over, and it's all downhill from here? Or is it a simple retracement, gathering strength to push past $2000? I have no idea.  And I make no recommendations." Even with non-voting shares, you own a portion of the company including all of its assets and its future profits.  If the company is sold, goes out of business and liquidates, etc., those with non-voting shares still stand collect their share of the funds generated.  There's also the possibility, as one of the comments notes, that a company will pay dividends in the future and distribute its assets to shareholders that way. The example of Google (also mentioned in the comments) is interesting because when they went to voting and non-voting stock, there was some theoretical debate about whether the two types of shares (GOOG and GOOGL) would track each other in value.  It turned out that they did not - People did put a premium on voting, so that is worth something.  Even without the voting rights, however, Google has massive assets and each share (GOOG and GOOGL) represented ownership of a fraction of those assets and that kept them highly correlated in value.  (Google had to pay restitution to some shareholders of the non-voting stock as a result of the deviation in value. I won't get into the details here since it's a bit of tangent, but you could easily find details on the web.) "This is a tough question, because it is something very specific to your situation and finances. I personally started at a young age (17), with US$1,000 in Scottrade. I tried the ""stock market games"" at first, but in retrospect they did nothing for me and turned out to be a waste of time. I really started when I actually opened my brokerage account, so step one would be to choose your discount broker. For example, Scottrade, Ameritrade (my current broker), E-Trade, Charles Schwab, etc. Don't worry about researching them too much as they all offer what you need to start out. You can always switch later (but this can be a little of a hassle). For me, once I opened my brokerage account I became that much more motivated to find a stock to invest in. So the next step and the most important is research! There are many good resources on the Internet (there can also be some pretty bad ones). Here's a few I found useful: Investopedia - They offer many useful, easy-to-understand explanations and definitions. I found myself visiting this site a lot. CNBC - That was my choice for business news. I found them to be the most watchable while being very informative. Fox Business, seems to be more political and just annoying to watch. Bloomberg News was just ZzzzZzzzzz (boring). On CNBC, Jim Cramer was a pretty useful resource. His show Mad Money is entertaining and really does teach you to think like an investor. I want to note though, I don't recommend buying the stocks he recommends, specially the next day after he talks about them. Instead, really pay attention to the reasons he gives for his recommendation. It will teach you to think more like an investor and give you examples of what you should be looking for when you do research. You can also use many online news organizations like MarketWatch, The Motley Fool, Yahoo Finance (has some pretty good resources), and TheStreet. Read editorial (opinions) articles with a grain of salt, but again in each editorial they explain why they think the way they think."