Futures Calendar Spreads on Interactive Brokers

Trading futures calendar spreads is a good way to express a long or short opinion an underlying index or commodity, without the volatility and margin requirements of a fully directional naked future contract. We are using Interactive Brokers (IB) to trade future calendar spreads, but many other future brokers offer this. Here we can review an example Natural Gas /NG bullish calendar spread, that should benefit from a rise in the commodity price. This bull future spread means long a front month future contract, and short a back month future contract.

To describe trade entry and exit on this bull future spread we will use the IB “buy” and “sell” terminology as follows:
Trade entry – means to “sell” the spread (go long front month, then short back month)
Trade exit – means to “buy” the spread (short front month and go long back month). This is the exact logical opposite of trade entry.

Futures Calendar Spreads – Demo Account

Before you place any real trades here it is highly recommended use the IB demo trading mode of Paper Trading. Click “Try the demo” link below from the IB login screen. The IB future trading interface is somewhat non intuitive and requires a reasonable learning curve to fully understand what futures positions are being represented.

Interactive Brokers Paper Trading Login - Futures Calendar Spreads

Trade Entry

Trade Entry was on 27th Feb 2018

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry

These are screenshots of entering the order from the demo system. Using the demo system for dummy order execution avoids accidental executions with “real” money. Please note that the market has moved so that the demo system screenshots do not match the above “real” trade entry executions – however the process to follow remains identical.

For some historical context, this is the 1 year chart of the spread:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - Chart 1 Year

This is where to select the relevant menu item from the SpreadTrader utility:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Start menu

This is how to select the front month and back month. Importantly can not select just one calendar spread, must select two or more spreads otherwise the “Finish” button does not appear.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Configure Futures Spreads

Click on the relevant “ask” for the calendar spread and the following order entry will appear.
As we are selling, make sure the limit price starts higher than current Ask.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Order Entry

Followed by this order display:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180227 Trade Entry - SpreadTrader Order Display

Walk down the limit price downwards (because we are selling) by 0.001 increments on the order until you achieve a fill.

Trade Update

This trade update was on 18th April 2018 to enter a GTC order to allow possible trade exit after the time frame for the 30 day rule has elapsed.

Identify the long future leg in the front month from the Account Positions, and select Contract Description menu:

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Long Leg

Review the contract description and note the symbol. In this case the symbol is NGM8. Verify that the futures contract named month and actual expiration date are as expected.
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Long Leg Contract Description

Repeat process for the short future leg in the back month from the Account Positions, and select Contract Description menu:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg

Review the contract description and note the symbol. In this case the symbol is NGQ8.
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg Contract Description

Now look at the chart to identify a target exit price. Create a new chart of the calendar futures spread that is the long near month contract minus the short back month contract
Cut and paste NGM8-NGQ8 into the chart symbol entry text box and press ENTER. In this example NGM8 Jun 18 is the near month and NGQ8 Aug 18 is the back month.
Important – note that the label shown on the chart is the exact OPPOSITE way to what was entered!

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Chart 2 Months

Now create limit order exit trade to Buy. Right click on the chart and select Buy and drag down the line significantly underneath the chart. Click the “T” on the order.

To exit this trade need to sell the near month (that is long Jun 18 position) and buy back the far month (that is short Aug 18 position). IB defines this exit trade as a Buy 1 Calendar Spread. Since we are buying, start limit order with a low limit price, so that it can be cancel and corrected (updated) multiple times to achieve a better price. In this example started at 0.038. See the screenshots below for an example order.

Order Entry:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - SpreadTrader Order Entry

Order Preview:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Short Leg Order Preview

Active Orders:
NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Orders

Trade Summary

Looking at the chart, trying to achieve the lowest price makes sense, as we wish the difference between the near month Jun 18 and far month Aug 18 to shrink not expand. This can be a good til cancelled (GTC) order that can be hung out there until a price target is achieved – historically there seems to be support at 0.040 to 0.030 range, so that could be a good starting target (but you can obviously adjust for your trading style). If you want to get an immediate fill on a trade exit today, then just cancel and correct the order in 0.001 increments until it fills. Alternatively you can leave the order out there for the trading day to see if anyone nibbles at it, then get more aggressive on closing it nearer the end of the day.

NG Feb 2018 Short Futures Calendar NGM8 - NGQ8 20180418 Trade Update - Chart 6 Month Limit Order

In theory most futures calendar spreads are mean reverting, so we are looking for a move back towards the long term mean to capture some gain. We are not looking to make a killing on the directional trade – even though this is a “long” natural gas trade it usually a pretty slow moving spread. Additionally the spread may only go into that range for a few hours or days during its remaining trade lifecycle into end of May expiration, so we just want to grab a good price with a GTC if it’s there. Also we don’t want to hang around for the unpredictable spread volatility for the 2 weeks or so prior to expiration, so if it is still open at that time we’d probably just close when it gets too close to expiration.

Portfolio Principles

Portfolio Principles – Risk Management

Risk management is arguably more important than any actual trading strategy. Multiple traders can run the same strategy, but could get widely different results because of their risk management rules and whether or not they actually apply their rules properly under market stress.

Take risky positions with small amounts of capital that limit downside on trade entry

Use capital efficiently – for example use ETF option spreads or deep ITM ETF call options instead of buying ETFs outright.
Where possible with exchange listed products use option spreads on trade entry to limit downside risk.

For risky positions in small cap or alternative investments the stop loss is zero, so only enter with what can afford to lose (e.g. use maximum $10k per idea).
Visualise what to do if that $10k position is down 90% – should be nothing because the risk was sized on trade entry.

Risk is always sized on trade entry and never increased through the lifetime of the trade

Don’t reestablish the same trade immediately after exiting for a loss. That is effectively the same not having any stop loss risk management.

Everyone has their maximum risk limit tolerance, except for some very rare investors like some institutional traders who don’t feel emotion or pain on losses.

Investment Themes

Cash is a really bad long term investment, and should be thought of as a constantly decreasing asset due to inflation. However cash is very useful to have for short or medium term opportunity. 100% invested is likely missed opportunity cost for an investment theme not thought of yet. 100% invested all the time is only suggested by the fee based investment management so they can get paid.

Recognise the difference between “themed generation investments” and just a trade. Long SPY call spread $250/$255 for next month, is just a trade (so don’t leave one leg on and treat it like an investment). Long bitcoin or 3D printing stocks can be a multi year trade.

Trading and long term holding are both ok in a portfolio – just be clear which positions fit each category.

In volatile markets like crypto currency a month can feel like a year. Global stock markets are not truly as volatile because they are very mature market – the perceived volatility is often due to investors position sizing traditionally makes it a large part of their net worth.

Don’t attempt to follow investment theme advice from too many sources because it clouds your vision. but read as much as you can on different investment opinions and perspective. If you read something you don’t agree with – decide why you don’t agree with it and see if there is any thing it could add to your own rules. Always stay with your own rules. Importantly investment is about what you believe other market participants will do, not your personal opinion. Your personal opinion on market direction isn’t worth that much. e.g. if you think S & P 500 is on the biggest bubble since Dutch tulips, but you have noticed that many other people are comfortable with it – might be getting limited long exposure.

House Money

“A stock operator has to fight a lot of expensive enemies within himself.” Reminiscences of a Stock Operator by Edwin Lefèvre

After a large profit take the original risk out of the position, then let the rest run as “house money”. Always try and play long term with “house money” if you can because it removes some of the original fear of loss from the trade.

You are probably limited by what you believe is a lot of money. This type of scenario is directly applicable to the crypto market for the last year. Assume you invested $10k, then exited original $10k from position – so still have a position but no risk – and over time the “house money” position goes to $100k. If ultimately lose $100k of “house money” from the peak valuation of that investment – is that an acceptable risk ? If you make have unrealised gains of $100k do you want to exit immeadiately because you cant stand to give it back ? What if the unrealised $100k profit goes to $50k but they goes to $200k afterwards ? Can you handle the swings – even with house money ?

Do you assess the trade based on how much money you have in it ? Or it is based on the investment idea still being valid ?

If you lose on the trade do you anchor to that loss ? Or do you believe that opportunity always come along ?

There are never optimal trades in financial markets, only “good enough”. You will always leave something on the table. Does this achieve initial trade targets ? Whether is was a winner or a loser – was it a well managed trade ? Loser management is as important as winners.

The legendary investor Bernard Baruch who came through the 1929 crash mostly in tact was asked what made him such a successful investor. He replied: “I always buy ‘too late,’ and sell ‘too early.’”

Managing position trades through big swings

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing, initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Bill Gates got his money because he owned a stock, Microsoft, and it went up eight hundred times, and he stayed with the trend. He sat through one of the greatest bull runs in the history of civilization. He understood the pain of gain.
Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game”

Personally I believe it is physiologically easier for me to trade a limited risk option spread strategy because I know how much I can lose every month – but the expected return is only 5% to 10% a year. However handling huge swings in a wild crypto bull market is much harder – yet infinitely more profitable – and after taking out the original stake to play with house money there is no money at risk. It is way more profitable to simply hold positions in a bull market, than trade around them.

Position Entry

This quote is from Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game” – after showing a picture of rapidly sloping up chart with a “You are here” arrow at the top of it, this is the quote:

“How many people want to be long and stay long this chart?” And about 60% will raise their hands. And how many want to get off this investment and sell it ? Then 40% or so will say get out. And I say “You 40% should never ever invest your own money in your entire life! Because you’ve got this contrarian bug, and this the greatest way to ruin that there possibly is. It means you’re going to buy every brand – you’re going to buy things that go to zero and sell things that go to infinity.”

Do you have a temptation to buy cheap on the way down? Buying cheaper is good, but better done when potential is not yet released in new issues that have no overhead supply. Will make more money buying into a market rising off a low base, than trying to pick a bottom in a “race to the bottom”in multi month decline.

Which of these are you tempted to buy ?

Option 1 – uptrending market that is already 20% for the year moving to recent multi year highs, off a 1 year flat base
Option 2 – downtrending market that is already down 60%, and heading steadily lower over a number of months with some -10% months along the way

Its really hard for me to do 1 & very easy for me to 2, because of personality type. Don’t like to overpay for anything & like the idea of getting a “bargain” (cheapskate). Plus the implication that you are smarter than the market because you picked close to the bottom (ego).

Final quote from Paul Tudor Jones “Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”

Download Portfolio Principles eBook for Kindle

Exiting Bitcoin Investment Trust due to Premium

This trade exit on GBTC describes how exiting Bitcoin Investment Trust due to premium was decided. The original GBTC position was purchased in March 2017. To recap the GBTC is an investment trust whose price is tied to bitcoin. The historically high premium to the actual underlying bitcoin price is the main reasoning for selling our GBTC position and replacing it with bitcoin and etheruem products that can replicate similar exposure (without that premium). This trade was IRA eligible so there was no issue of paying extra capital gains by selling after 11 months (instead of waiting for 12 months for long term capital gains to kick in).

Exiting Bitcoin Investment Trust due to Premium

The charts below compares an European based Bitcoin fund SE:BITCOIN.XBT (as a proxy for Bitcoin spot price) with GBTC. This clearly shows that throughout 2017 people have been prepared to pay a huge premium to own bitcoin in their US based brokerage account.

GBTC Feb 2018 1 year trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 1 year trailing premium - 20180215

GBTC Feb 2018 3 month trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 3 month trailing premium - 20180215

Combined with bullish Bitcoin 2017 price action and inflated premium, the GBTC price has moved up strongly. The above charts and Bloomberg show how the GBTC premium has moved for the last 12 months in a trading range of 50% to 120%. In only the last 3 months the GBTC premium has been as high as 120% in Dec 2017 and low as 30% in early Feb 2018. The premium trades aggressively higher on rallies and lower on sell offs. This behaviour has the effect of amplifying trading extremes, but increasingly makes it a less reliable buy and hold product.

As a recap, when the trade was entered in March 2017 GBTC premium had shrunk down to about 8% because there was the belief that a new Winklevoss Twins bitcoin ETF was about to be allowed by SEC. Once that was announcement was negative, the GBTC premium returned with a vengeance.

According to Bloomberg the average trailing 12 month GBTC premium was 53% (on 16th Feb 2017). By comparison the Bitcoin tracker fund premium was 0.08%. Additionally there is a 2.0% management fee associated with GBTC which is used to help manage the cold storage and security of the underlying bitcoin asset – so any premium paid on the actual GBTC spot price would seem to be excessive. The Bitcoin tracker fund management fee is 2.5% (higher) but since it trades at only 0.08% premium to NAV it is a relative “bargain”.

On 16th Feb 2017 GBTC had a 1 year performance return of 1,574.75% that more than double the Bitcoin tracker fund 1 year return of 774.33%. This is amazing given that the stated aim of the products is identical – the GBTC out performance results are exclusively due to premium.

For reference here are the Bitcoin and Ethereum products available that trade in Europe but can be traded in a US based brokerage account. These products do not have a huge premium to spot bitcoin and are IRA eligible. Bizarrely the swedish Krona product has the higher volume, over the Euro based product. All of these fund products introduce some currency risk exposure, but that is likely less to be way less variable than the GBTC premium risk.

Bitcoin Swedish KronaCOINXBT:SS
Bitcoin EuroCOINXBE:SS
Ethereum Swedish KronaCOINXBE:SS

A Good Trade but Poorly Traded

This GBTC trade was ultimately a great investment, but one that was traded frustratingly poorly.

A small tranche was sold in May 2017 to cover the risk on the original position and the rest was left to run as “house money”. Clearly with hindsight that was the “wrong” thing to do, but is it good risk management on a very volatile product – and allows staying in the trade for a much longer amount of time. This risk management part was not poor trading, but the management of the resulting price action in 2017 can be improved – as discussed below.

The final run up into Dec 2017 was not well traded, and therefore missed the significant peak at $39, and survived the drop to $10 in Feb 2017, so decided to exit with some value still intact at $18. This is a very hard trade to take psychologically because of the anchoring to the high point at $39. However the 1300% returns in less than a year is still amazing, yet disappointing from a trading perspective. The split adjusted entry point was $1.44 so clearly this was all “house money” but some exit trading at higher prices should have been achieved into the Dec 2017 peak. This is not purely hindsight – it was clear the short term nature of the blow off top, even during Dec 2017. This does not mean the end of the bitcoin “bubble” – just a medium term trading top that should have been taken advantage of.

Bitcoin Investment Trust premium – Trade Exit

GBTC premium expands on rallies (up to 120% in Dec 2017) and contracts on huge sell offs (down to 30% in early Feb 2017). On trade exit at about $18 that is approximately an average 80% premium, which is somewhere in the middle of the range extremes for the last year. On trade exit with bitcoin at approximately $10k, the book value (or NAV) of GBTC was about $10, therefore there is approximately $8 of premium to nav (or about 80%). Therefore about 1800 shares of GBTC buys approximately one bitcoin, but the book value is about 1000 shares. Clearly there is a convenience premium, but 80% over book value is very high. That does not mean GBTC price cannot rise further, or the premium increase more in 2018. However if the premium ever shrinks to say 30% then it is quite possible to lose money in GBTC even if the bitcoin price goes up. When you buy GBTC at $18 about 45% of your purchase is premium (or “fluff”) over the price of the underlying bitcoin. That is a very hefty premium to spot.

Trade Entry was at GBTC split adjusted $1.44 (actual pre split price at that time was $131) in March 2017 when bitcoin was approximately $1250. Trade exit was $17.96 when bitcoin was about $10025 in Feb 2018.

Trade Replacement

The GBTC investment can be replicated without premium using the Bitcoin tracker funds. Since 1000 shares of GBTC represents approximately 1 Bitcoin, these trading approaches could be taken:

1. Sell 1000 shares of GBTC ($18,000 USD) and purchase $10k Bitcoin tracker fund – this maintains exactly 1 Bitcoin exposure. The remaining $8000 premium can be maintained as cash for future purchases if there is a pull back or for other investments. This maintains bitcoin only exposure.

2. Sell 1000 GBTC then purchase $10k Bitcoin tracker fund and $8k Etheruem tracker fund. This gives exactly 1 Bitcoin exposure but allows using the GBTC premium to buy a new Etheruem position. This has created a slightly more diversified crypto portfolio – but still fully invested in crypto, with no cash on hand.

3. Sell 1000 GBTC then purchase $6k Bitcoin tracker, $6 Etheruem, and keep $6k cash. This gives a less aggressive portfolio because it keeps some cash on hand in case of a pull back.

4. Sell GBTC and maintain cash to wait for a big pullback to invest. If you are a believer in the long term crypto currency bull, this is arguably the biggest opportunity risk – crypto prices are hard to predict and can be notoriously bubbly – so it having exited once at lower prices it is hard to reestablish at significantly higher prices.

These reallocation strategies are all tax optimal in an IRA.


There is a significant chance that if there is a bullish BTC price march in 2018 towards $20k again then GBTC will do very well. Indeed one day later BTC is already trading 10% higher at $11,000 (so clearly this is proving a badly timed exit). However there need to be discipline to recognize when that the GBTC trade now has premium risk outside of just Bitcoin spot price risk. That risk can be resolved by selling GBTC and buying bitcoin tracker funds.

This is not necessarily a price extreme for bitcoin, but a potentially a premium extreme in GBTC. Still bullish on bitcoin and crypto assets for the next few years, however GBTC may not prove to be a good long term buy and hold product (due to the premium).

In summary this is not purely a bitcoin play, but has become a play on the premium investors are prepared to assign for the convenience of exchange traded bitcoin product. Importantly selling GBTC is a not a bearish call on bitcoin or crypto in general, just trying to avoid being the last one out when playing musical chairs with the premium trade.

Robotics and Artificial Intelligence Investment Basket

The Internet of Things, Robotics and Artificial Intelligence are nice buzz words in 2017 & 2018. But how to structure an investment response to it ? This explores how to create a simple purchasable basket of exposure without too much individual stock risk. With limited time we dont personally have the time to go down the rabbit hole of individual stock investing. That said we did end up chosing one stock for the “internet of things” exposure.

Robotics and Artificial Intelligence banner - 20180111

Robotics and Artificial Intelligence Investment Basket

Looking for exposure to the theme there are a couple of existing ETFs. This seekingalpha article compares the holdings of ROBO & BOTZ. Given that both ETFs both had merits, they were equal weighted in the final investment basket.

Internet of Things

There is a SNSR etf that is trying to provide an “internet of things” theme, but as pointed out here it has :

  • a very high correlation to the standard technology sector XLK (so you are really just buying a less liquid technology ETF)
  • the internet of things theme cuts across sectors, and some stocks included in SNSR only have a small part of their operations dedicated to it.

The basket used a 10% allocation to IDCC instead of SNSR, because it one of those rare technology stocks that is actually cheaper priced in Jan 2018 than one year earlier.

Investment Basket

This was the investment basket decided upon:

ROBO – 45% – Robots and Automation – ETF overview
BOTZ – 45% – Robotics and Artificial Intelligence – ETF overview
IDCC – 10% – internet of things – company overview

Bitcoin Investment Trust Premium

This is a bitcoin investment trust premium idea from seekingalpha.com we have taken a position in last Friday.

Investment Setup

GBTC is an investment trust whose price is tied to bitcoin, with an extreme caveat that historically it has traded as sometimes astronomical premiums to the actual bitcoin price. The chart below clearly shows people have been prepared to pay a huge premium to own bitcoin in their brokerage account.

Bitcoin Investment Trust GBTC Price Arbitrage Idea - 20170310

The chart is not easily available online. It had to be created manually by downloading the time series for GBTC prices and bitcoin prices, then working out the “premium other NAV” between them. When this was done both the GBTC & bitcoin prices were indexed back to 100, and the “premium over NAV” was plotted on the same Excel chart. Note that each individual GBTC share represents 0.09336483 of a Bitcoin (BTC) – so that ratio need to be accounted for when calculating the premium.

These are some highlights from the chart:
- GBTC premium to bitcoin price has been as high as 100% down to 5% in last 12 months
- GBTC was trading at a significant premium (70% to 100% range) to actual bitcoin price in June/July 2016
- GBTC is now only trading as about a 5% to 10% to bitcoin price in March 2017
- This premium has trended lower in last 2 months in anticipation of new Winklevoss bitcoin ETF (COIN) getting SEC approval.

Short Term Investment Thesis

- If bitcoin ETF (COIN) is approved, then this premium should be reduced further – but GBTC price will rise due to bitcoin price
- If bitcoin ETF (COIN) is not approved, then premium should revert to 30% range & GBTC price should increase to reflect that
- Absent a huge bitcoin crash this should be a winning scenario in either case

Medium Term Investment Thesis

- Bitcoin is stable above $1000 for 2017
- Historical 30% premium to bitcoin price is restored, because there is no longer a viable pending Bitcoin ETF that would compete with GBTC.
- GBTC has applied to be listed on the NYSEARCA which is pending a decision by Oct 2017. It currently trades on OCTBB and if it moves off the bulletin board this should improve product liquidity and investor access. GBTC premium might trend up in anticipation of this a few months out from the announcement (something to watch).

Bitcoin Investment Trust premium – Trade Entry

Trade Entry was at GBTC $131 on Friday when bitcoin was approximately $1250. Trade exit would be when a the premium is restored to typical range greater than 30% – but we have to wait 30 days to exit due to 30 day rule.

Is lending crypto currency safe?

Excitingly it is now possible to lend out your Monero and other crypto currencies to other investors. Crypto currency lending is a bit like peer to peer lending for crypto, but the lending purpose is exclusively for other customers margin requirements (so not diversified). Lending crypto currency needs to be done via a crypto currency exchange where your currency is loaned to other exchange customers so that they can establish short or margin long crypto currency trading positions. This article chiefly considers lending out Monero (XMR), but the principal applies to any other crypto currency that allows exchange lending.

lending crypto currency

As an investor annual rates of return on any individual loan have ranged from 3% to over 100%. The rates on exchanges are typically quoted in daily returns, so a daily rate of 0.009% is approximately 3% – you can easily use any online calculators to convert any daily rate to an annual rate. An example annual to daily interest rate calculator is here (no affiliation).

We use Poloneix for lending, and find it gives good liquidity and relatively simple trading interface and order book. There are other platforms like Bitfinex but haven’t used them for lending.

As of October 2016 to our knowledge, no one has ever lost significant money lending Monero (or any crypto currency) on poloniex or other exchanges (so far). However before you go “all in” there are some significant risks to be aware of. The attractive returns are not just a free lunch. Here are some basic risks…

Margin risk

The main issue with exchange lending is it assumes that the exchanges algorithm for exiting customers out of their margined positions will not result in major loss. Essentially when lending on the exchange, your xmr is loaned to other exchange customers so that they can establish short or margin long positions. As usual for margin trading the exchange requires some capital level to be maintained in a customers exchange account, for the duration of their short or margin trade. If the crypto currency market moves against the customers positions and they no longer have the margin capital required to maintain their position, then the position will be exited by the exchange. This will likely be at a sizable customer loss. The theory is that the exchange has modeled the maximum likely amount capital required across ALL customers to meet an extreme move.

In theory the crazy moves should occur rarely and the exchange should be able to control any loses by forcing customers to liquidate their positions in real time. Basically they can take out multiple customers over their margin limit, but in theory not all customers at the same time should be affected (in theory!). However in practice these huge moves tend to happen more frequently than the statistics would predict. A good recent real life example is when the Swiss franc move meant several foreign exchange (FX) trading firms had to eat a few million of customer losses. This was in the FX currency market, but the principal could easily apply to crypto currency lending. Therefore you are depending on your exchange to have well executed customer margin requirements and forced trading position liquidation strategy.

Platform risk

Exchange lending and indeed storing any crypto currency on any exchange is subject to platform risk. That is the risk that the actual exchange platform fails and you lose some or all of your crypto currency balance. This could occur through hacking of poor exchange security or even an issue with the particular crypto protocol that can be exploited. Basically there is a slight possibility that your coin on an exchange just disappears overnight. You can obviously reduce hacking risk on your individual account by using website security features like two factor authentication. However that doesn’t guard against back door hacking exploits at the exchange level. You should probably keep no more than 20% of your entire stash with one website, and even possibly budget for 20% of it disappearing every 3 years! For example, storage solutions for monero are to maintain a cold storage (off exchange wallet) under your control. That requires significant technical know how to setup, but is likely worth it to maintain your stash securely.

If you don’t think that exchange default can happen look at the historical hacks on mtgox Bitcoin (March 2014) and bitfinex (August 2016).

Important takeaways highlight these two possibilities storing your coin on exchanges:
- total loss: many mtgox investors lost all their bitcoins
- partial loss: Bitfinex distributed the losses against all customer balances irrespective of cash or coin.

The Bitfinex partial loss example has an interesting piece of moral hazard. Note that even though only Bitcoins got hacked, ALL the OTHER coin balances on your reduced by 36% and were replaced with an exchange IOU! Essentially you were exposed to Bitcoin security flaws even if you had zero Bitcoin balance – which seems somewhat logically unfair. The point is that you could be exposed to balance loss for any coin on an exchange – even you did not think you were.

Is lending crypto currency safe?

The non bitcoin crypto lending market is typically less than 2 years old for most coins. Lending crypto currency on any exchange may mean that there may technology glitches (eg unable to liquidate as required) or lack of volume (eg not able to lend out all the currency you wish to, because there are not enough people to lend to). However we have tried this though and have been able to lend out several thousand XMR for about a week relatively easily. The % return is potentially good for the risk, typically earning about 5% to 15% annualised on average – even if you have some loans in the 15% to 100% range – typically it is hard to get an entire portfolio allocated at those interest rates.

This also all assumes a relatively low default rate which may not be true for people trading crypto currency on margin in the long term (only have a few months of real data to work from). It maybe long term profitable as well, but given that that there are no statistics yet on this market, it is hard to make accurate projections. However if using US equity lending as an example, most brokerages seem happy to lend to you at about 6%, so assuming the underwriting model for margin accounts is similar, then this could offer decent long term returns.

This approach is also somewhat similar to peer to peer lending (eg prosper and lendingclub), so could offer similar returns, but is probably a level up on the risk spectrum (above say junk bonds). Bear in mind that any defaults that occur could be long term expensive, because you lose out on the long term price appreciation potential of your currency of choice – it would be disappointing if you lost half your coin stash on lending, only to see your chosen coin price rise into the clouds in the following months.

In summary, it is worth a look as an idea, but there is significant “very bad event” risk for any crypto currency exchange platform that is hard to quantify. It would almost definitely not be prudent lending out your entire monero stash, in case in does not perform as expected. However investing about 5% to 25% of your monero stash in margin lending can give you “pseudo dividend” on an investment which otherwise doesn’t yield anything – but you might wish to spread your lending over multiple exchanges.

Protecting Foreign Real Estate against FX rate moves

Protecting Foreign Real Estate against FX rate moves is important if you own overseas property.
Protecting Foreign Real Estate against FX rate
We currently own one cash flow positive property with no mortgage in Canada, and are in process of buying a 2nd property. Basically we are looking to achieve a few things:

  1. Diversify away from US dollars (USD) using foreign currency in a stable country
  2. Get long some oil using the commodity currency Canadian dollar (CAD) as proxy. This works because crude oil and CAD are positively correlated.
  3. Get some relatively cheap real estate in a different country, to diversify away from a high cost US area where we live.

Our home currency is US dollars (USD) and the properties will be run in Canada with all local Canadian dollar (CAD) income and expenses. The plan is to take a commercial mortgage in Canadian dollars (CAD) across two houses at 50% Loan To Value (LTV). From a US dollar (USD) perspective this is essentially long / short CAD in almost equal amounts, where the house equity is “long” Canadian dollars and the mortgage is short Canadian dollars.

Obviously this still has all the usual real estate risk locally, such as local economy downturn, vacancy periods, high maintenance expenses (etc). This assume that both property will be cash flow positive (they will) and because we have a local property manager, they essentially run themselves. Again here we made sure both properties are initially cash flow positive so should be able to hold long term – we are have given enough margin of safety with 50% equity that we can safely (hopefully) assume that should not be forced to sell even if local property prices were to significantly decline. There are no planned foreign exchange (FX) conversions planned in the day to day running of the Canadian properties.

In summary the 2 properties would be exactly 50% long 50% short CAD (house equity/mortgage) with built in equity cash flow (the rent minus expenses).


Below we can see that there are a few risks to owning foreign properties. We will focus mostly on FX risk for this discussion, but it is worth highlighting the others below.

  1. FX risk. With our 2 properties if the CAD USD FX rate declines so much, we would have a paper loss in USD due to the original equity we have in the properties – even if all other factors like local house prices and monthly operations are constant.
  2. Local real estate risk. The local economy could have a significant downturn, we could have issues with vacancy periods, property may require higher than estimated maintenance expenses. These are the standard real estate risks, just that they need to managed remotely by our property manager.
  3. Pay Bid/ask spread on any FX transactions. Every time money is sent to Canada we have to pay the bid/ask spread on FX conversion. We use a currency dealer who gives decent spreads (approx 0.7%), which is not great, but significantly better than main street banks.
  4. Local company regulations to run a real estate company. There are initial company setup fees, annual province (state) filing fees to maintain a Canadian holding company to own the real estate. Need to maintain a Canadian based accountant who is familiar with Canadian tax law. There is an annual cost of holding real estate in a Canadian entity, however these pro-rota into annual property expenses and are covered by the rental income. The company does not require extra money to be added annually to cover these costs. However this require effort to ensure compliance with regulatory, legal and tax obligations for owning property in Canada – however the because it being held in full Canadian based entity paying Canadian taxes crucially . Most importantly no tax is withheld on rental income because the company is considered a Canadian resident – so there are benefits to doing the extra paperwork.
  5. Bankruptcy risk on company operations. The cash flow is not sufficient to maintain operations and/or a unforeseen event occurs that makes your real estate business operations not viable. However because this was setup inside a company structure, then this limited only to the real estate itself, not your personal finances.
  6. Sovereign country risk in Canada. Economic issues such as lower oil prices or a recession could make real estate prices decline or make it find to locate well qualified local renters. This is the same in any real estate investment, however the Canada economy is typically more tuned to commodity cycles than the US economy. Current central bank strategy between are different US and Canada – where US Federal Reserve is raising rates, while Bank of Canada is holding rates. Canada was also in a technical recession for last 2 quarters (but has lifted in latest quarter) – USA has been steady so is currently relatively more attractive. However the Nova Scotia economy is separated from the larger cities of Vancouver/Toronto/Calgary – it will be impacted by economic cycles but traditionally they don’t tend to have huge commodity boom/bust cycles. CAD is commodity funding currency, so about 80% correlated to moves in Oil. Oil prices have moved down from $110 to $40 ish. Importantly it is worth noting that currencies are also relative not absolute – even with a recession, if Canada does “better” than USA then its currency could rise versus USD. CAD USD FX Rate is not as correlated with standard equity markets, more commodities, but it has a full service based economy (essentially tied to the US economy) and its not Brazil (e.g. not just taking a punt on an emerging market currency just as a commodity play).

US v. Canada mortgages

There are some differences between Canada and US mortgage markets for primary residences and rental properties. Mortgage interest is not deductible on primary residence for an individual in Canada (as distinct from US where it is), however mortgage interest is deductible on rental properties. Although there is no capital gains tax (or gains limit) on primary residence.

Given that, some Canadians do rent their primary residence and buy rental property, rather than necessarily buy own home. Essentially this can be a viable option because of the tax code. Long term renting where you live (and buying rental property investment with the spare cash) could make more sense. Whereas in the US, the tax code is massively skewed to buying your primary residence.

Plus most Canadians banks keep mortgage loans on their books – that is they don’t securitise or resell loans straight away to other banks like they have in US. Therefore a Canadian bank is highly motivated to make sure their own underwriting is effective, because they could be carrying the loan for up to 25 years (which explains why big bank lending can be relatively cautious).

This explains the relative historical stability of the Canadian housing market. The differences between the US and Canadian mortgage market explain some of the slightly more cautious lending practices, but frankly that makes it more attractive as an investment. Canadian mortgage market is actually slightly different to the US market, but in a good way for investments.

We found commercial mortgage underwriting standards very strict, maximum they would do was 65% LTV (and they were still debating that..). Other banks would do higher LTV, but they require a significant financial deposit or savings to be with the bank before the loan would be advanced (sometimes up to 50% of actual loan size was required to be on deposit!). Local credit unions had more flexible terms underwriting terms than the big banks.

FX Rate Risk – Historical Moves

Now let us have a look at the historical moves of USD CAD FX rate to see what risk we are actually taking on. We will look at historically what was the largest FX move where Cad strengths (moves against you) on an annual basis in percent terms. For example the total percent depreciation was -24% in last 5 years (% move where start date is T-5 years and end date is today). However that is not typical and is a significant down move, however that is why the the investment opportunity exists.

Below is historically what what were annual USD CAD FX moves in percent terms since early 1990s. These have been calculated from a spreadsheet that uses average monthly prices (for each month) from Jan to Jan – it is not 1st Jan to 31st Dec – but they give an indication of expected historical annual moves.

In the following table a positive percent means USD weakens against CAD (investment makes money). A negative move means USD strengthens against CAD (investment loses money).

Percent move
2016 (YTD)8.5

Based on this you can see that there were typically price movements in the annual range of -10% to 10% volatility, however the last 3 years have been double digit declines every year (which is unusual).

FX Rate Scenarios

This section will look at USD CAD FX rate scenarios where it stays the same, goes up or goes down (think we covered every possible angle in the investment world there!).

  1. Stays the same or goes up. If the CAD stays the same or appreciates we would probably just hold. If it appreciates very significantly it might be worth send back any cash flow in appreciated CAD into depreciating USD. This return of cash flow would act as a psuedo annual dividend. Ultimately in several years if there is significant FX rate appreciation it could be worth just selling one or both properties and converting it back to USD. It is completely possible you might make limited local real estate gains but significant FX gains due to FX rate appreciation. Importantly FX gains are not taxable, but obviously you have pay local Canadian taxes on any capital gains. The mortgage will be a greater debt in USD so you would not want to use USD to pay down the mortgage, just use local CAD cash flow for that.
  2. Goes down. If the CAD depreciated further the total real estate investment starts to lose money mark to market in USD. This is probably not a problem in local CAD currency to manage monthly operations, however it is still a mark to market loss that we might wish to reduce. Additionally with a significant move of say 10% or more we would consider paying down some mortgage principal (in CAD) with strategic annual USD to CAD transfers (as the rate is in our favour). Since a major risk to our investment is if the FX rate declines, in the next section we will look at some possible strategies to help manage that scenario. These strategies will be to pay down the mortgage or hedge the FX rate.

FX Rates risk management – hedge FX rate

The main question we have to ask is, do we technically even need to hedge with a 50% / 50% split of mortgage / equity all based in CAD currency?

The mortgage is in CAD and we are amortized principal payments in CAD. So on one hand we are long 50% in CAD exposure due to the real estate value (at 50% LTV). But on the other hand if you are taking a loan in CAD, you are short 50% CAD because you benefit from the USD strengthening. The exact 50% / 50% split of an asset in CAD vs liability in CAD, gives a built in natural hedge.

Also if we are going to hedge how aggressively should it be done ? There is a fair amount of equity (long CAD) position in the real estate, however as an investor it is better to take a view and hedge less. There is no value in hedging away all the risk to invalidate the actual investment idea.

It is possible to use /6C Canadian dollar futures put options to “disaster hedge” the FX rate. We are already holding a 5% OTM put 6 months or 1 year out for contracts of /6C, hedging at about a 0.25 delta on average. These are then rolled up or down after a few months as necessary as the FX rate moves. Additionally it is then possible to sell OTM call spreads against FX rate for income, to slightly offset the cost every month. If FX rate declined 10% would probably recycle that money into CAD mortgage and re-hedge. As long as keep long term OTM hedges in place this can be relatively cheap less than 1.5% a year of total investment – and that assumes zero gains from short call spreads which is not likely if rate declined. This is managed in a trading account along with other spreads (eg Long gold, short oil etc). Ideally it would just lose a small amount of money each year (which other spread can make up for) which is what happened so far this year. Fundamentally we would see this real estate investment as a married put strategy (long 2 houses in CAD, with long contracts on /6C futures put) on a dividend paying stock (small monthly rental cash flow profit plus paying down mortgage).

If rate went down 20% in a year you would lose money mark to market, but it would probably lose only say max 5% to 10% in a year (depending on option rolls). This assumes no other variables change, and assuming no gains from overlay trades and ignoring mortgage paid down which is about 1.25% of principal risked in first year. But point is that now the investment is not undefined FX risk. Any profit on hedges could either kept as cash or Fx back over to pay mortgage.

The issues are that it costs some money to hedge, but we are used to managing it as a trading account anyway. Leverage on those options is very good in a rate crash scenario. There are also cheaper / limited risk reward ways to keep short delta eg put calendar and ATM call spreads. As long as the “disaster hedge” with the 3 contract /6C put is always in place (in case the floor falls out again) should be ok. For example, when FX rate crashed in Jan 2016 that put option made significant USD dollar amount. Hedges are based in a USD trading account.

Ultimately in several years time you have 2 houses and lower mortgage principal, so over time your FX risk (CAD principal) increases so might have to increase hedging size later on.

FX risk management – pay down mortgage

If rate goes down 10% against CAD, the mortgage can be paid back with more valuable USD dollars. Any significant mortgage principal reductions early in the lifetime of a mortgage can have reduce the ultimate pay back time.
Therefore it would seem sensible to do a small principal payment (say between 1% to 10%) each year to reduce the mortgage if the FX rate is consistently in your favour.

However don’t want to pay down too much of mortgage, because you are increasing your long exposure to CAD each time you do that. Effectively you might be removing your hedge against a depreciating currency when you might need it most.


Even if the CAD currency is beaten up due to a lower oil price, Nova Scotia is a relatively diversified local economy on multiple sectors (not heavily oil related like some western Canada economies). Historically steady not commodity boom and bust (even in 2009). Also real estate is reasonably priced even in local currency, and it’s a buyers market there. Don’t need to make a killing in local landlord market, just need to keep lights on. Worse case mortgage is paid back in 25 years (typically commercial mortgage length in Canada) not 30 years like US residential mortgage. Plus ultimately own 2 houses at the end of the investment, which should more than match any FX move.

We decide to hedge, but keep it light. Hedging is an art no right or wrong answer. Since basically we were looking to diversify a bit from USD, want to get long some oil (via CAD) and own local real estate it is a good transaction. We only hedged approximately half our exposure, so if there is a strong oil rally you win on the original investment idea, and don’t lose too much hedging. Also if the FX rate moves significantly against us then the hedging will help and we could pay down the mortgage more. There is “no free lunch” (is there ever?) but the risks can be managed, and a significant move in the FX rate in either direction can still hopefully be managed to our advantage.

Oil Futures – Trade Exit – 29th Aug 2016

We can use Futures Options to enter a bullish oil trade using Crude Oil /CL Bull Call Spread – this gives a slightly bullish bias in oil. The Bull Call Spread is a limited risk reward trade with typically a one to one risk reward. The specific trade was entered on 29th July with $41 / $42 bull call spread when Crude Oil /CL was around $41.5 – essentially attempting to exactly middle the spread around the current price, but still defining the amount of risk to take. The trade cost $5.4, simply $540 per Crude Oil /CL contract. At expiration it could be exited for a max amount of $10 ($460 gain) or expire worthless for $0 ($540 loss). This was slightly worse than our typical 50/50 bet (about a 46/54 bet!) but it was close enough to get the trade executed, without having to wait too long for the market to position itself exactly in between the strikes.

Trade Entry

This shows trade entry prices:
CL Jul 2016 Bull Call Spread trade entry - 20160729

Looking at our portfolio, we also have on a post Brexit short CAD call spread that was acting as a nice counter balance to this trade. The Canadian Dollar /6C and Crude Oil /CL prices are positively correlated, meaning most of the time if oil prices go up, then Canadian Dollar would also rally.

Trade analysis

On 26th August /CL closed at $47.29 which is about $5.29 (12.6%!) over our max profit strike, which is very likely to realise the maximum profit of $460 if held all the way to expiration. The current open unrealised profit is $350. The blue rectangles on the Crude Oil /CL option chain below highlight the $41 and $42 strike options that make up the trade. The red circles highlight the strike and delta for the $42 call. This shows that the $42 call has about a 76 delta which meant that it had about a 76% chance of the spread being in the money by expiration (and making the maximum profit).
CL Jul 2016 Bull Call Spread option chain analysis - 20160826

However the 30 day rule period will be up on Monday 29th August, therefore we set the limit profit order to trigger at $400 profit or $9.5 limit (which is 85% of max profit). We would like $400 out of the trade, so we have to set the limit $0.1 higher to allow for commissions. With no commissions $400 profit would be $9.4, but including commissions it is $9.5. Technically there is $60 extra to make in this trade by holding all the way to expiration, but that would be about $940 risk to make $60 over 20 days into expiration so probably worth just closing it. It could be left to expire for next 20 days, but according to the option market there is a still a 25% chance that oil crashes to our higher $42 strike by expiration – so it is safer to exit on Monday for most of the profit and not have to worry about it.

The following chart shows the full trade life cycle marked up with our comments:
CL Jul 2016 Bull Call Spread chart trade analysis - 20160826

Oil Futures – Trade Exit

In the slight oil rally on 30th Aug the limit order was triggered and trade exited. This shows trade exit prices:
CL Jul 2016 Bull Call Spread trade exit - 20160830

In summary we made almost the full profit available in this trade, and exited as soon as possible after the 30 day rule allowed, but still let the market trigger the limit order for us to get the target $400 – this was a solid 74% profit on capital risked (profit $400 / risk capital $540 = 0.74).

Monero XMR – Trading Update – 26-Aug-2016

Monero XMR – Trading Update needs to be given this week, specifically because the market has recently moved massively upwards since the latest trading update in March 2016.

Please note that due to market volatility it is quite hard to capture consistent pricing for screenshots – so any prices given or calculations done using those price are only indicative (but they should still be approximately correct).

Monero XMR – Trading Update – Overview

As of Aug 22nd 2016 there are currently available approximately 12.8 million Monero XMR. With a current Monero XMR price of $4.20 USD, that gives a marketcap of approximately $53.6 million (in USD). This size compares it with a small penny stock, so it still has significantly size to grow if it is even slightly adopted for any mainstream uses. The following screenshot from coinmarketcap.com gives a quick overview:
XMR Aug 2016 Market Capitalisation - 20160826

Since most people probably have not heard of it this is a quick overview – Monero is an alternative currency (sometimes referred to as “coins”) with the most well-known being Bitcoin. In the last 2 years there have been many such coins created for a diversity of purposes. These new “coins” are the brave new world for cryptographic currency (“cryptocurrency”, or even “crypto”), but are still in the early adoption phase. One of the main selling points of Monero is that it can mathematically provable as truly anonymous, unlike Bitcoin with can be traced via the Block Chain. It is one of the foremost alternative crypto currencies that has actually survived long enough to potentially become a replacement for the well known Bitcoin (BTC). For some more background you can review our original investment from last year.

Monero XMR price since inception

The following chart shows the price swings for Monero since inception, priced in Bitcoin BTC. This highlights the mini price bubbles on inception, in Mar 2015, Mar 2016 and most recently in Aug 2016. You can track the real time Monero XMR to Bitcoin BTC price here.
Monero XMR Trading Update Monero Historical Price Chart Since Inception 20160826

Monero XMR Trading Update – Year to date 2016

This price move appears to be a significant move on large volume, therefore worthy of a trading update. Monero XMR is going up because of fundamentally wider adaption in other market places, which means that it will get used as currency of choice by more people who want crypto currency. Specifically this move has been driven by news that leading dark net market will start supporting Monero. The assumption is it will win the war to be adopted as the primary crypto currency, potentially ultimately replacing bitcoin (but that is several years out). Don’t know if move is sustainable in short term, but it’s based somewhat on fundamentals, not just a speculative pump (with no reason) which sometimes happens with these coins.

The following chart zooms in to show the significant volume move year to date up to August 2016. From a low of 0.00105 BTC to a high of 0.00938 BTC, with a current trading price of about 0.00735 BTC on 22nd August 2016. In the last week Monero has traded approximately 65,000 BTC on poloniex. Assumming the average Bitcoin price of $576, that is approximately $37.4 million USD.
Monero Historical Price Chart YTD 2016 20160826

Valuing Monero in US dollars

Importantly all the Monero charts shown above are valued in Bitcoin BTC. The Monero Bitcoin XMR BTC exchange rate is more reliant on the value of bitcoin itself. So if you liquidate any Monero using the XMR BTC price you then obviously end up holding Bitcoin, which can obviously have it’s own price volatility (and is a competitor for Monero). For example if positive Bitcoin related news caused the Bitcoin price to rise faster, the XMR BTC will go down even though nothing may have fundamentally changed with Monero.

Therefore looking at the Monero XMR exchange to USD dollar can be a better independent value indicator because it doesn’t depend on value of bitcoin.

There is a USDT coin that literally stands for “US Dollar Tether” which is a coin representation of USD cash. As the following chart shows Monero XMR to USDT (USD dollar) price is at all time highs in USD, similar to Monero XMR Bitcoin BTC price. However Monero has always mostly trended upwards in USDT (US dollars), without the Bitcoin related swings.

Monero USDT Historical Price Chart YTD 2016 20160826

Liquidating Monero XMR into USDT means you are attempting to replicate “cash”, but importantly without having to convert back to physical US dollars. That is if you hold USDT it attempts to represent the equivalent in USD cash in your local bank account, but actually as a coin so you can trade to buy other coin. This is useful because there are increasing regulations about adding usd to coin related investment, and if you are already in the coin eco system this is a good way to “go to cash” with out actually exiting into real US dollars.

Haven’t done enough research to understand USDT long term stability – and its definitely NOT FDIC insured like a bank account! However presumably it is safe enough for a few weeks while you plot your next investment move (or move it to physical USD). However be careful with USDT liquidity if moving from XMR on poloniex, the order book (scroll down search for “Sell orders” section) may only support a few hundred XMR at a time so don’t try and liquidate a huge position without small test orders first.

eBook including our disclosure

In the spirit of full disclosure, our current position is approximately 0.1% of all outstanding Monero so we are definitely “long”. However that has been held from more than a year. The aim is for a buy and hold investment though and we very rarely trade the core position (for example, have made no sales for more than a year). We could exit or scale back significantly if something materially affected the Monero marketplace, however we are more likely to add on weakness not sell. The cost basis of the investment is relatively low, so we are not actively trading day to day. Typically the price drifts along, but then takes off faster than you can react, as per this recent month’s rally – so our investment option is that the ability to time trades around the position is not as important to actually have a position. We have no plans to sell any Monero yet, but if the price went exponentially higher we would sell to cover our original cost basis. However if you are a true believer in cryptocurrency for a long term medium of exchange you’d never sell any this cheap anyway.

If you are interested in learning more we have written an eBook Better than Bitcoin – A Beginners Guide to investing in Monero.

Gold Futures – Trade Exit – 15th Aug 2016

Gold Futures – Trade Exit on 15th Aug 2016. We can use Futures Options to go through Bull Call Spread example. We originally entered a gold Bull Call Spread with a slight bullish bias in Gold, but mostly just to get some trades on. The Bull Call Spread is a limited risk reward trade with typically a one to one risk reward. Typically we would pick the options on futures that expire 45 to 60 days out. This gives plenty of time for the trade to move in the expected direction. This means that you don’t have to monitor the trade too closely throughout its lifetime, with is important with a 30 day rule.

However even if the trade is totally wrong, then can likely salvage a bit of value to either exit, or re-establish in the next monthly cycle. e.g. if the trade was placed for $500, it might only be worth $250. At that point could sell the whole spread, then do the same trade at the same strikes for the following month – this simply allows time in the trade if you still like the trade idea.

Gold Futures – Trade Exit

The specific trade was entered on 14th July with $1325 / $1335 bull call spread when /GC was around $1330 – essentially attempting to exactly middle the spread around the current price, but still defining the amount of risk to take. The trade cost $5, simply $500 per /GC contract. At expiration it could be exited for a max amount of $10 ($500 gain) or expire worthless for $0 ($500 loss).

This shows trade entry and exit prices:
GC Aug 2016 Bull Call Spread trade exit - 20160815

On 15th August /GC was about $1345 which is about $10 (0.75%) over our max profit strike, which is not a lot distance for the several days remaining in the trade. The trade had a profit of about $200 out of a maximum of $500, but clearly was only slightly out of money so that could be erased with a swift down move. However on investigating the delta of $1335 call gave about 63 delta which meant that it had about a 63% chance of making money by expiration. However we also know the probability of a touch at a higher strike is much higher than the probability of finishing at a particular strike at expiration. To define that another way – although this was currently looking like a marginal trade, there was still a high probability of exiting with a 50% of max profit ($250 profit target out of a maximum $500) between now and expiration.
There we set the limit profit order to trigger at $250 profit or $7.6 limit. Technically this would be $7.5 limit, but we set an extra $0.1 on the limit price (or $10 value) higher over our profit target to allow for commissions. The commissions on this trade are 2.31 for each option leg for entry and exit, which is $9.24, which is over time this adds up, so moving the limit by $0.1 covers those commissions nicely.
We then went to sleep, and luckily in the morning the limit had been filled due to a nice rally.

The following chart shows the full trade life cycle marked up with our comments:
GC Aug 2016 Bull Call Spread chart trade analysis - 20160825

In summary there was more profit available in this trade that ultimately we didn’t take, however we did make a solid 50% profit on capital risked. Also the trade reversed recently in the last week, meaning that if we had held on into expiration we would know be looking at -$200 loser (using today’s prices). The difference between taking the $250 or waiting for the -$200 loser is $450, so that is a significant swing for the trade size. Therefore taking the profit on the profit target was the right decision, and consistently taking profits on the winners helps balance out any future losing trades. We are getting better about not being disappointed with not making the “maximum” each time, and now we try simply moving on to the next trade.