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4 ETFs to Grab in These Volatile Times

09/29/2011 7:00 am EST


John Netto

Author, The Global Macro Edge

There are plenty of ways for traders and long-term investors to capitalize on the current market conditions, says trader and radio host John Netto. He believes gold ETFs are still good trades, and has some suggestions for bolstering the trade by using out-of-the-money options as well.

Kate Stalter: We are talking today with John Netto, and John before we get into discussion of the markets, tell our listeners a little bit about what it is you do.

John Netto: I’m a professional speculator. I trade for a living. I also speculate on sports for a living as well, and I host a show called Sports X Radio, which can be heard on, as well as on Sports Byline USA.

What I do is bring the world of Wall Street to the world of odds-making, and bring those two together. This is an industry that is growing quite a bit, and a lot of the market-making models, a lot of the techniques and strategies used to trade, you can also use when it comes to handicapped sporting events as well.

Kate Stalter: I wanted to ask you for your current take on the market, given all these models that you are using. What are some actionable ideas that individual investors can take advantage of right now?

John Netto: When it comes to putting forth actionable ideas, it is key to understand what an investor’s threshold of risk is: How much pain they can take, what their return is.

Assuming, in a vacuum if you will, that a person is looking for the best risk-adjusted return possible and they are comfortable taking on some greater exposure, I think there are a few things you want to do right now.

Clearly we have seen a bounce back this week, following what has been a very tumultuous and high-volatility environment from the previous weeks. As a result of that, implied volatility has gone up quite a bit and premiums on options have gone up quite a bit, as well.

Also read: Bullish…with Some Reasonable Doubt

So if you have longer-term holdings, if you are a person that is going to be retiring in the next five, ten, or 15 years, if you are a person that has a lot of time behind you, depending on where you are at, I think that one way to play the market in the next couple of weeks is to buy something like gold.

I think that gold is a much better safe haven then the underlying equity markets, and the options behind gold right now are priced pretty richly.

So by stepping in and buying the Market Vectors Gold Miners ETF (GDX), it is the ETF that has the top 30 gold miners’ stocks out there, you can buy the GDX between $55 and $59. Around there, this week, is where it has been trading.

You can sell an out-of-the-money call on it up near $63 to $64 for three months down the road and earn a nice return. Because I think what we have seen from the GDX is, when it undergoes the kind of technical damage that it has done—even with gold as well—it does take some time to consolidate, but net-net the secular uptrend in the gold market is still very much in place.

So I think that buying the GDX and selling some out-of-the money calls against it is a great way to build a longer-term portfolio, and take advantage of the short-term implied volatility priced into options.

Kate Stalter: Now how about for investors or traders, John, who want to just get into equities, the equity trade either through individual stocks or ETFs, any ideas for that group?

John Netto: Sure, yeah, and again I think for all the ETF traders out there, whether you are trading the SPDR Gold Trust (GLD), which is the ETF for gold, or the GDX, which is the ETF for the gold miners, or even the PowerShares QQQ (QQQ) or the Spyder Trust (SPY), I think it is a market right now that you can look to sell rallies and look to buy breakdowns, in terms of at least this week, anyway.

Also read: There’s Gold in Them Thar Stocks

I think longer term, the market is going to be in trouble this fall. What we have seen in terms of volatility is a harbinger, as opposed to an aberration, for things to come. So looking at where the S&P is at, and looking at the balance we have seen this week, I think we are going to head back down and test those lows one more time after we work off some of this oversold sentiment.


Kate Stalter: For longer-term investors, any ideas there? Should they continue to be defensive, or start looking at some new watch list names?

John Netto: I can’t think of how to be more defensive then to own gold. I know I keep coming back to this, but since Operation Twist came out from the Federal Reserve meeting last week—and even leading up to that actually—the dollar has undergone a nice little pop. I’m not sure that that move on the dollars is going to abate any time soon.

What I do think we will see, though, is gold rallying with the dollar. So you can trade the dollar index—DXY is the symbol behind the dollar index if you want to follow that—and you can just be aware of where the dollar index is.

You can trade the ICE futures in terms of the dollar index itself, CME futures if you want—you can short the euro. The euro, I think, comprises like 56% of the dollar index as it is situated right now. So being short the euro or selling the euro on balance…

I think for the longer-term investors, when you take a defensive posture, you want to be long gold, you want to be exposed in dollars, you want to be short euros. I think that proves a great way to hedge, or at least a nice overlay to what your longer-term portfolio consists of.

Kate Stalter: You just talked about shorting the euro. How about any instruments that if investors have continued to hold, that maybe they want to consider exiting at this point?

John Netto: Again it all depends what your mandate is. It all depends what your angle is. If you are committed to staying long a certain percentage as a buy-and-hold path to investment strategy, than you are sort of stuck, or you are going to ride the ship, I guess.

If you want to take a more active approach, though, I do think the GDX stocks are shorter term, and are going to go through more of a consolidation choppy period. Owning them and then selling out-of-the-money options against it is a great way to benefit from a rising but choppy trend up.

So I would just reemphasize that point. In looking over all the currency space, I think that the Japanese yen is another space that I can see that breaking down. The dollar-yen rate has been flirting with that 75.50 to 76 level. It wouldn’t surprise me if we ended up down at 72 or 71, despite the coordination attempts by the Bank of Japan and some others to keep it elevated.

Also read: Yen/Gold Ratio: A Window Into Japan

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