Rule Two: Buy more time until expiration than you may need — at least three to six months — for the trade to develop.
Time is an investor’s greatest asset when you have completely limited the exposure risks. Traders often do not buy enough time for the trade to achieve profitable results. Nothing is more frustrating than being right about a move only after the option has expired.
With these rules in mind, I would recommend the Market Vectors Gold Miners ETF (NYSEARCA:GDX) March 2014 20 Calls at $7 or less.
A close below $20 in Market Vectors Gold Miners ETF (NYSEARCA:GDX) on a weekly basis or the loss of half of the option’s premium would trigger an exit. If you do not use a stop-loss, the maximum loss is still limited to the $700 or less paid per option contract. The upside, on the other hand, is unlimited. And the January 2014 options give the bull trend almost six months to develop.
This trade breaks even at $27 ($20 strike plus $7 options premium). That is less than $2 above Market Vectors Gold Miners ETF (NYSEARCA:GDX)’s current price. If shares rally back to the midpoint resistance target at $39, then the call options would have $19 of intrinsic value and deliver a gain of more than 170%.
Recommended Trade Setup:
— Buy GDX Jan 2014 20 Calls at $7 or less
— Set stop-loss at $3.50
— Set initial price target at $19 for a potential 171% gain in 7.5 months
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