Managing Your Risk: ETFs vs. Futures Contracts
Most traders don’t understand that when they’re taking a futures trade, they are taking obligation and full-liability of the total value of the contract. When you trade a futures contract, you are subject to a margin requirement in order to initiate a trade—usually around 10 to 15% of the full-value of the contract. For example, silver might have an initial margin requirement of $12,000 per contract. Let’s say you want 5,000 ounces of silver…
Based on current prices at $15.40 for silver contract, 15.40 x 5,000 = $77,000 full value of 5,000 ounces at $15.40 each.
But here’s the danger with Futures:
The danger, particularly in overnight markets, the volatility can be extreme, and silver could fluctuate 50-75 cents in either direction during a trading session. If you’re not financed properly when silver moves, you will be subject to margin calls, which means you will have to come up with additional funds to meet the obligation of a futures contract up to the full value. And trust me, many investors who didn’t fully understand a futures contract have seen their retirement go up in smoke within a few seconds and owing hundreds of thousands they don’t have…
But there is good news, because I’ve discovered a way to eliminate the margin risk if I trade ETFs instead of Futures … and there’s a lot of comfort managing this risk when it’s not as “risky”. With ETFs—particularly the XXX Velocity ETFs related to gold and silver—the comfort comes because we apply the same strategy for the futures contract ($12,000 initial margin for silver), and instead we buy $12,000 worth of these ETFs at market price-per-share. When you buy ETFs per share instead of a futures contract, it automatically eliminates the margin risk, because there are no longer any margin obligations. To give you a good example of 3X velocity ETFs, let’s take a look at this week’s recommendation …
We’ve recently been trading an ETF instrument for the gold and silver markets that brought returns of over 300% within 30-days:
GOLD MINING SHARES: (N:JNUG)—a Triple-X Velocity Bull ETF—seeks daily investment results, before fees and expenses, of 300% of the performance of the Market Vectors Junior Gold Miners Index. The Fund seeks daily leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. However, JNUG is different and much riskier than most exchange traded funds … which is why you need a manager to guide you through the minefield. My whole idea about trading is to manage the risk and maximize the profit potential of my dollar investment, and the ideal goal is to produce above average returns.
Take a look at the volatility we predicted back in November, 2015: As you can see here just a few weeks ago on January 19th, the low was $17.40 per share. The high on Friday February 19, was $61.50—more than triple—from Jan 19 to Feb 19.
From January 19th to February 19th—less than 30 days—this ETF tripled in price over 300% return, as the price of gold went up $200 per ounce during the same period. And this was just last week!
No matter what trading instrument you compare it to, 300% is an incredible return when compounded annually, especially when you incorporate the risk-reward ratio accordingly. This is the kind of strategy we are using in instruments like JNUG—very volatile, XXX velocity instruments, used to build equity aggressively—and deliver exponential profits in a short period of time. These ETFs are securities … You buy dollars per share, not on margin for day or swing trading. These XXX velocity ETFs are aggressive enough that you don’t need to buy on margin or be subject to margin calls. All you need to do is allocate a certain amount of money you want to invest in building equity aggressively and be patient with it. The volatility we have in these securities is amazing. It meets our criteria to trade the volatility successfully by applying our proprietary algorithms. ETFs are one of the most incredible instruments I have found that have allowed me to hold on to it as a swing position or as a long-term position trade without being subject to margin call like a futures contract. It’s an incredible way to make money with the metals, and we are producing 10 to 1 more profits by trading these instruments, than actually trading a futures contract.
TECHNICAL SUMMARY
The gold and silver markets dropped sharply after fulfilling a decisive upside target by reaching a high of 1.263 the week of February 11th, 2016. This advance which was led since the middle of December into last week validated and confirmed the long-term prospects for 2016 to be the beginning of the next secular gold bull-market in gold and silver. The market’s reaching its targets for this cycle period last week could usher in a time when some consolidation could take place.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Trading derivatives, financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.