Skot 2011 Report

8/3/2019 Skot 2011 Report

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SK Options Trading 9th

January 2011

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2011 Report

Introduction

Now that 2011 has drawn to a close we will take a moment to review our trades for the year. This

report aims to summarise our trading strategies throughout the year, with full details given of all

trades closed in 2011.

If you acted on our trading signals the return on our letter is 11.73 times the fee paid, given a

$10,000 portfolio.

Contents

1-Introduction2-Key Stats

3-Review of Our Outlook for 2011

4-Getting Off To a Good Start

5- Positioning For the Next Leg Up

6- Getting Aggressive On Gold

7-Japanese Tsunami

9-No position is Still a Position

11- Gold and Silver Correct, CME Hikes Margins

13- The Value of Our Service

Our Performance Since Inception


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Key Stats:

32 trades closed in 2011. Model Portfolio increased by 40.95% based on the 32 trades closed in 2011. Each trade had an average return of 20.57% in 59.41 days in 2011. A $10,000 portfolio would have increased to $14,095.33 based on the 32 trades closed in

2011.


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Review of Our Outlook For 2011

In 2011 our main focus remained on gold and also silver, since those were the markets that we saw

the most trading opportunities. However we also executed profitable trades in other markets such

as US equities and treasuries, and we continue to monitor these markets for trading opportunities.

Gold showed strong bullish fundamentals coming into 2011. The effects of QE2 were still being felt

and although US real rates were increasing, a weak US dollar was supportive of higher gold prices.

We set a target for gold of $1500 that we thought would be achieved in the first quarter of 2011,

gold reached this target in mid April, but we did not see gold rallying significantly past this level

without further monetary easing. Not only do we risk our own capital in all the trades we signal, but

we also put our money where our mouth was by offeringa full refundto subscribers if gold didnt

trading above $1500 in 2011.

We continued to hold the view that gold stocks were a very poor way to invest in gold, a view we

have held since May 2008. We actively discouraged owning gold miners as a way to gain exposure tohigher gold prices and even suggested that a Long Gold/Short Gold Stocks pair trade would be a

good play. Our piece entitled Are Gold Stocks The Real Barbarous Relic?details our reasoning for

this view. A Long GLD/Short GDX pair trade would have returned 26.2% during 2011, so we continue

to feel vindicated in our view.

We also believed that silver prices would enjoy a similar rise and therefore we planned to take

similar positions on SLV. Whilst we largely avoid precious metal stocks, we considered SLW to be one

of the only companies that we would trade due to its unique business model. Therefore we

considered purchasing some call options on SLW to complement, and add leverage to a silver

position. However we informed our subscribers that ...overall we are more comfortable with taking

gold positions, since we believe the metal has better technical support therefore when we do

undergo a correction, silver could be hit a great deal harder than gold. Silver prices would go on to

correct by over 32% in May 2011, a correction we were fortunate enough to be largely protected

from.

Our subscribers were informed that we did not ...see a positive year for the global or US economy,

and the same goes for equity markets, unless we get another dose of quantitative easing which could
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fuel another rally in stocks. Once we have established our positions in gold and silver, we may look to

take some bearish vertical credit spread positions on SPY. Simply put we do not see what will drive

the stock market higher in the short term, except a possible QE3 by Bernanke.

The S&P only managed to reach 1350 before falling dramatically and eventually ending up

unchanged for the year. Whilst for a few months it appears as though happy days were here again,markets quickly reversed upon the realisation that the large boom in economic activity had been

largely fuelled by the easing of monetary policy and the rebuilding of inventories after the 2008

crisis.

Getting Off To a Good Start

We thought that the major rally that began for gold in August 2010 to have one more leg to go

before a serious correction. However we were wary of how far gold had rallied and we were looking

for a consolidation, therefore we began the year by opting to sell vertical put spreads on GLD. These

trades expressed the view that gold prices would either go sideways or move higher.

On the 13th of December 2010, we signalled to Sell GLD Jan 22 '11 $128 Puts for $0.68 and Buy GLD

Jan 22 '11 $127 Puts at $0.55. This results in a net credit of $0.13.

Then the 16th December 2010, with gold prices weakening slightly, we added to our vertical spread

position with two trades. We signalled to Sell GLD Jan 22 '11 $128 Puts for $0.92 and Buy GLD Jan 22

'11 $127 Puts at $0.75 with a 10% allocation, and to also sell GLD Jan 22 '11 $127 Puts for $0.73 and

Buy GLD Jan 22 '11 $126 Puts at $0.60 with another 10% allocated to this trade.

All three of these positions played out as we expected, expiring out of the money with maximum

profit of 13%, 17%, and 13% respectively. This got 2011 off to a good start for SK OptionTrader

subscribers.

We had set a target of at least $1500 for gold in 2011, with this possibly being hit in the first quarter.

With the intention of positioning ourselves to benefit from this move, we told our subscribers of our

plan to ...target out of the money call options on GLD, with strikes above $145 in April and June

contracts.

A bout of selling in early January in precious metals did not deter our bullish stance; in fact we saw

this as a good buying opportunity. Our decision to sell vertical put spreads on GLD as opposed to

buying call options proved to be a good one since our put spreads banked modest profits whilst calls

would have been hammered. Technically speaking we thought gold and silver not being overbought,

and with support in gold, we issued a plan to target April and June GLD calls with strikes of over $145and strikes of at least $30 in SLV. As was gold trading around support at $1350, on January 7th we

signalled to our subscribers to buy GLD Jun 18 '11 $145 calls at $3.25, buy GLD Jun 18 '11 $150 calls

at $2.28, buy SLV Apr 16 '11 $30 calls at $1.31 and buy SLW Jun 18 '11 $40 calls at $2.57 with 5% of

our capital allocated to each trade.

The first of these positions to be closed were our silver positions. Our short term target of $30 for

silver was reached as silver rallied much more sharply that gold, and although we remained bullish

on silver over the long term, we felt it was time to take profits. On the 8th of February we closed this

position at $1.42, taking a profit of 8.40% in 32 days. A week later on the 15th

of February, we closed

our SLW position with a profit of 7% after holding this position for 39 days. Although these profits

were not spectacular, the number of trapped longs in the market meant that higher price levels

were likely to be not met. Therefore we were happy to close with a profit, and wait until these


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trapped longs were flushed out of the market before entering new positions on SLV. There turned

out to be far more trapped longs that we had thought, given the eventual spectacular crash in silver

prices in May.

Positioning For the Next Leg Up

We continued to hold our GLD positions and, taking advantage of a selloff in gold, we added to these

positions by buying GLD Jun 18 11 $145 Calls at $2.70 and GLD Jun 18 11 $150 Calls at $1.79 on

January 14th

. We allocated 5% of our model portfolio to these trades, as we had for our other open

GLD positions.

We opened a vertical put spread on January 19th, with a signal ... to sell GLD Feb 19 '11 $128 Puts at

$0.71 and buy GLD Feb 19 '11 $127 Puts at $0.58 for a net credit of $0.13, with 10% allocated to this

trade.

Despite our open GLD positions being down, we maintained our bullish stance on gold. This was

partly due to the technical situation for gold being oversold:-The $1325 area was a key support for gold.

- The RSI was at 33.88, a very low level historically.

- The longer term picture still appeared bullish in our view.

This simple chart was provided to subscribers to demonstrate these points.

We told our subscribers that we were looking for gold to hold $1325 before adding to any open

positions. If gold fell below this then it could fall to around $1270, the 200 day moving average,

although this situation was unlikely we intended to ...load up on GLD calls as we would see it as an

extremely rare and lucrative buying opportunity.

The volatility in gold at this time coincided with volatility in US real interest rates, which we considerto be a key component of gold prices (See our December article:The Key Relationship Between US
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Real Rates and Gold Prices) We told our subscribers this 10yr TIPS yields have shot to 1.27%, then

fallen as low as 0.90%, before ending this week at about 1.09%. We think that QE2 will continue to

keep US real rates low and lead to higher gold prices in 2011; we maintain our forecast that gold

prices will rise to at least $1500 this year. However in the longer term the picture appears less clear

to us. If the US undergoes a full economic recovery US real rates will rise, implying that gold prices

will fall. We believe such a scenario is a fair way off so we will deal with this issue closer to the time,but we are keeping a close watch on the situation with the view to formulating our longer term

outlook.

As February began the big focus for markets was the US employment situation, which in our opinion

did not give a clear signal. However it was clear that the market took a positive view on the report,

seeing the glass half full so to speak, with Treasuries selling off and equities making gains. We saw

December 2011 calls being bought consistently with strikes between $1800-$2000, whereas $1400

calls across all months were not been as well bid. A rough translation of this was that gold may not

have been moving much higher soon, but when it does move the rise will be swift and sharp. This

fitted with our view that gold was in a correction/consolidation phase at that time, but would look to

break much higher later on in the year.

In mid February, we updated our subscribers on our strategy going forward. We let our put spread

expire, allowing us to take the maximum profit of 13% for our $128/$127 GLD Feb 19 11 vertical put

spread in 31 days. We also looked to close out our GLD calls. This reflected our view that volatility

would continue to decrease and therefore call options would underperform. Recall that a decrease

in implied volatility decreases the value of options. We said that we would consider buying calls

again if gold broke out above $1425. However, until then we felt that selling put spreads offered a

better risk/reward ratio.

Getting Aggressive On Gold

As gold closed above $1425 at the beginning of March, we told our subscribers that ...gold appears

to have broken out and could now run to $1500...we are confident enough to warrant adding to our

long positions in the next trading session. We will be targeting OTM GLD calls, looking at June 2011

expiration with strikes above $150, most probably $150 & $155.

In addition to this breakout above $1425, the weekly Bollinger Bands were looking very bullish for

gold. The chart below shows weekly gold with its Bollinger Bands and we have overlaid the BB width

to further demonstrate our point. These bands (a measure of volatility) often tighten before a major

move and at recently they have tightened considerably, having just now turned wider. Our

interpretation of this was correct and gold rallied to over $1500 in the next two months, delivering

handsome profits to our subscribers.


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January 2011

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During the next trading session (March 2

nd

with gold just over $1425) we signalled to buy GLD Jun 18'11 $155 calls at $1.46 with 5% allocated and GLD Jun 18 '11 $150 calls at $2.23, also with 5%

allocated. Then as gold retreated slightly we signalled to buy more of these calls. We bought GLD Jun

18 '11 $155 Calls at $1.20 and GLD Jun 18 '11 $150 Call at $1.72, both with 5% allocations. We were

now aggressively long gold.

Continuing to hold our position in gold, we informed our subscribers that we were considering

buying some silver calls in accordance with our bullish view. This silver position was opened on

March 10thwith the purchase of SLV Jun 11 Calls at $1.19 whilst silver was trading around $35. With

the rapid increase in the price of silver, we felt that silver had come too far too fast. In less than 2

weeks on March 23rd

we closed this position at $1.65, providing our subscribers with a profit of

38.66% in just 13 days.

Japanese Tsunami

Although our main trading focus is on gold, we do constantly monitor other markets for attractive

opportunities. The tragic Japanese earthquake and tsunami sent the markets into a risk-off tailspin

with stocks plunging and safe haven treasuries soaring. Therefore our decision to place trades on the

S&P and US treasuries we based on the view that the reaction to what had happened in Japan was

overdone. So we took a short position on US treasuries and went long on the S&P, trades which

delivered returns of 15% and 18% to our subscribers.

Then on March 20th

we sent an update informing subscribers that we intended to take a short

position on US treasuries. The next day we signalled to Sell TBT Apr 16 '11 $35/$34 Vertical Put

Spread at $0.16 with 10% allocated to this trade. We would go on to bank a15% profitin 17 days on

this trade.
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After positive technical signals in trading in US equities, on March 28th we took a long position by

selling the SPY May 21 11 $125/$126 Vertical Put Spread at $0.18 with a 10% allocation of our

model portfolio. We would go on to earn a return of 18% on this trade, which waseight times higher

than the S&P 500 return during the same period.

As April began, gold broke new all time highs and we felt comfortable holding our GLD positions,

with plans to take profits as gold approached around $1500. We signalled to close our Short TBT Apr

16 '11 $35/$34 Vertical Put Spread at $0.01, collecting a 15% profit in just 17 days. We could have

held this trade until expiration; however we felt that the risk reward dynamics were no longer in our

favour.

Through March and April we opened various different vertical put spreads. The first of these was

opened on March 15th, we signalled to sell GLD Apr 16 '11 $131/$130 Put Spreads at $0.16 with 10%

allocated. This was allowed to expire worthless on April 14th, providing our subscribers with the

maximum profit of 16% in 30 days.

Instead of rapidly increasing after a breakout, gold was content to rally gently in an orderly fashion.

As a result our strategy for taking advantage of this market situation was tweaked to aggressively

sell vertical put spreads as an alternative to buying calls. Buying calls is best when the underlying is

expected to increase in a rapid, more volatile manner. Selling puts is preferable if volatility is going

remain tame or decline. This is due to the fact that options increase in value with volatility, therefore

if one thinks volatility is going to decrease then it is best to sell options; in other words be short

volatility.

Following this change in strategy, on April 9th we signalled to sell SLV May 21 '11 $37/$36 Vertical

Put Spreads for a $0.26 net credit with 10% allocated to this trade. We chose to open a similar trade

on GLD on April 13th, signalling to our subscribers to Sell GLD May 21 11 $137/$136 Vertical Put

Spreads for a Net Credit of $0.17 and an allocation of 10%.

Gold hit our $1500 target on April 20th, leading us to inform subscribers that we intended to close

our long GLD positions over the next few weeks. On April 26th, we closed our GLD $145 18 11 call

positions at $4.10. These were opened on the 7th

and 14th

of January and were closed for profits of

26.15% and 53.51% respectively. We also closed the GLD $150 Jun 18 11 call positions that we

opened on January 14th and March 3rd at $2.01, giving our subscribers a profits of 12.29% and16.86% respectively.
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The following week we signalled to close the rest of our GLD Call positions. On May 2nd, the first was

position to be closed was our GLD Jun 18 '11 $150 Calls, which we purchased at $2.23. This was

closed at $4.65, resulting in a profit of 108.52% for our subscribers in 61 days. The same day saw our

subscribers take gains of 116.67% as we closed the GLD $155 Jun 18 11 Calls, which we had opened

March 2nd

, for $2.60.

We continued to take gains two days later on May 4th, closing our remaining GLD Call positions. Our

GLD $150 Jun 18 '11 Calls that we purchased at $2.28 were sold at $3.50, resulting in 53.51% profits.

The GLD $155 Jun 18 '11 Call position that we opened at $1.46 was closed for a profit of 16.44% at

$1.70.

Overall we were very happy with how these positions played out; all eight have closed at a profit

with an average gain of 50.29% per trade. We closed all our long positions while gold was over

$1500, after which gold corrected to $1460. We had successfully ridden the rally and banked our

profits before gold prices corrected. After we sold our call options, they preceded to decline in value

before expiring out of the money and worthless.

Our first loss of the year resulted from our vertical put spread on silver. We signalled to close our

short position in the SLV May 21 '11 $37/$36 Vertical Put Spread by purchasing back the spread at

$0.60. This was a loss of 34% on the trade.

Although we are took a loss on the trade, we still think it is the right decision. As we told subscribers,

We put the chances of the spread expiring below or above $36 as around 50-50. Since we take a

100% loss if the spread expired below $36 and book a maximum 26% gain if the spread closes above

$37, the risk-reward dynamics are now skewed against us. It is for this reason that we chose to close

the position and take the loss, ending our streak of 59 winning trades in a row. Overall, we have still

closed 76 trades at a profit out of a total of 79.

No Position Is Still a Position

On May 21st both of our spread positions expired worthless, providing our subscribers with the

maximum profit available. Our SPY May 21 11 $126/$125 vertical put spread expired with 18%

profit, and the GLD May 21 11 $137/$136 vertical put spread expired with gains of 17%. This left our

model portfolio completely in cash.

We were 100% in cash, or near all in cash for over a month in 2011, through May and June. We took

a fair amount of criticism during this time for two reasons; firstly because we were not making any

trades and secondly because gold was challenging its all time highs and we refused to take any longpositions.

We will deal with the first point by saying that contrary to what many believe, one does not have to

be in to win, one simply needs to be in at the right time and on the right side of the market. Having

no position is in itself a position and one we were happy with at the time. In fact a 0% return during

that turbulent time saw us outperform the majority of market professionals.

The second point can be answered by explaining the inner dynamics of the gold market and

something that we call golds eurozone debt crisis premium. In short, we did not believe that the

rally in gold to challenge all time highs was sustainable as it was based on temporary fears over a

possible sovereign default. An excerpt from our article Trading Gold & Its Eurozone Crisis Premium

is included below for explanatory purposes.


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The market dynamics at work here are as follows. Traders and investors were concerned [in May

2010] over the Greek situation and therefore gold was bought as a safe haven or hedge against the

financial turmoil that could follow a Greek default. As the bailout package came through, the

probability of a default decreased and therefore those who were long gold as a hedge against a crisis

began to unwind their positions. This is what we are defining as the eurozone debt crisis premiumand the erosion of this premium contributed to the 8% fall in gold following the bailout. Without the

fears over Greece, we think that gold prices would have likely followed a path similar to the blue

dashed line on the chart above.

Just as an increase in the premium did not signal a new major rally in gold, a decrease in this

premium did signal a downtrend.

Changes in this premium do not significantly affect the overall trend or market fundamentals.

Another way to picture this is to presume that fears over eurozone debt can be measured on a scale

of 0-100%, with 100% meaning that the market is as fearful of a default as it can be and 0% being

equivalent to the market not having any fears of a default. When this measure is at 100%, theeurozone debt crisis premium is fully priced into gold and when it is 0% it is not priced in at all.

Without the Eurozone debt crisis premium gold prices would still follow on the path set by the

fundamental factors that move gold significantly and sustainably over the longer term, such as

quantitative easing.

Our understanding of these dynamics allowed us to correctly identify that the late May/June rally in

gold was not sustainable, whereas the July rally certainly was as it was fuelled by increased

monetary easing by the Fed. We do not focus on trading gold because it is in a bull market. We focus

on trading gold because we think we have a better understanding of the market dynamics at playthan many other market participants, therefore we have an advantage which we aim to profit from.


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January 2011

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During June we saw that silver appeared to be close to offering some attractive trading

opportunities. For a longer term horizon we felt that the SLV Jan-12 $45 calls (trading at around

$1.20 at the time) could be profitable, a drift in prices just a bit lower would make this opportunity

attractive from a risk reward perspective. This was based on our view that in the next major move

upwards silver could go up past $50, so the risk reward dynamics in these trades could be about tobecome too good to pass up. As the price of these calls fell over 40%, we signalled to our subscribers

to purchase SLV Jan 21 12 $45 Calls at $0.68 on July 1st with a 5% allocation. This trade would

eventually be closed for a 61.76% profit.

As gold prices had fallen towards the end of June, we chose to allocate 10% of our portfolio to GLD

Aug 20 '11 $140/$139 Vertical Put Spread with a net credit of $0.20 on June 28th.

Through July we had a combination of trades planned for gold, based on our view that gold prices

were about to embark on a major rally. US real interest rates wereheading lowerand we felt that

theflatteningof the US yield curve would cause the Fed to ease monetary policy further, which

would in turn drive gold prices past $1800. Far OTM GLD calls in January 2012 looked appealing; wealso liked the idea of a call calendar spread position, selling October 2011 calls to help offset the

costs of longer dated calls in January 2012. Selling vertical put spreads similar to the GLD trade we

currently had in place was another trade we were considering. On July 18th we opened these

positions, signalling to our subscribers to ...sell the GLD Dec-11 $145/$140 Vertical Put Spread at

$1.13, with a 10% allocation, ...buy the GLD Mar-12 $180 Calls at $3.50, with 5% allocated and to

...buy the GLD Jan-12/Oct-11 $170 Calendar Call Spread at $2.18, with 5% allocated. Then, as we

felt the risk reward dynamics of our calendar spread trade were still favourable, we allocated

another 5% to this position on July 28th at a price of $2.37.

As gold prices gapped higher in mid August, we felt that it was prudent to take profits. We closed

our long GLD Jan 21 12 / Oct 2211 $170 Calendar Call Spread, that we bought for $2.18 on the 18thJuly 2011 with 5% allocated, for $3.35 on August 9th

. This provided profits of 53.67% for our

subscribers in just 22 days.

Following this on August 11th we closed our second GLD Jan-12/Oct-11 $170 Calendar Call Spread

position, which was opened for $2.37 on July 28th, at $3.40. That meant a profit of 43.46% in just 2

weeks. On the same day we closed our GLD Mar 17 12 $180 calls, which we had opened at $3.50 on

July 18th

, for a fantastic profit of 197.14% in only 24 days.

August 19th saw us close yet another profitable trade for our subscribers, our short GLD Aug 20 '11

$140/$139 Vertical Put Spread position, opened at a net credit of $0.20 on July 28th, expired

worthless and so we banked a 20% profit on this trade

Gold and Silver Correct, CME Hikes Margins

While holding some positions though September we published an in depth report on what future US

monetary policy meant for gold.

Silver prices plunged in September and this combined with a reduction in our bullishness on the

metal, we reduced our exposure on September 22nd and sold our position in the Jan-11 $45 SLV calls.

We closed this position at $1.10 for 61.76% profit on the trade. We took advantage of the drop in

gold around the same time by signalling to subscribers to sell GLD Nov 19 '11 $150/$149 vertical put

spreads (a bullish play) for a net credit of $0.35 with of 10% of our capital allocated to this trade.
http://www.skoptionstrading.com/updates/2011/7/18/decline-in-us-real-rates-to-send-gold-past-1800.htmlhttp://www.skoptionstrading.com/updates/2011/7/18/decline-in-us-real-rates-to-send-gold-past-1800.htmlhttp://www.skoptionstrading.com/updates/2011/7/18/decline-in-us-real-rates-to-send-gold-past-1800.htmlhttp://www.skoptionstrading.com/updates/2011/8/3/us-yield-curve-flattening-to-prompt-fed-easing-and-1800-gold.htmlhttp://www.skoptionstrading.com/updates/2011/8/3/us-yield-curve-flattening-to-prompt-fed-easing-and-1800-gold.htmlhttp://www.skoptionstrading.com/updates/2011/8/3/us-yield-curve-flattening-to-prompt-fed-easing-and-1800-gold.htmlhttp://www.skoptionstrading.com/updates/2011/8/18/sk-optiontrader-generates-a-profit-of-4346-in-just-14-days.htmlhttp://www.skoptionstrading.com/updates/2011/8/18/sk-optiontrader-generates-a-profit-of-4346-in-just-14-days.htmlhttp://www.skoptionstrading.com/updates/2011/9/18/what-future-us-monetary-policy-means-for-gold-prices.htmlhttp://www.skoptionstrading.com/updates/2011/9/18/what-future-us-monetary-policy-means-for-gold-prices.htmlhttp://www.skoptionstrading.com/updates/2011/9/25/6176-gains-for-sk-optiontrader-as-another-profitable-trade-i.htmlhttp://www.skoptionstrading.com/updates/2011/9/25/6176-gains-for-sk-optiontrader-as-another-profitable-trade-i.htmlhttp://www.skoptionstrading.com/updates/2011/9/18/what-future-us-monetary-policy-means-for-gold-prices.htmlhttp://www.skoptionstrading.com/updates/2011/9/18/what-future-us-monetary-policy-means-for-gold-prices.htmlhttp://www.skoptionstrading.com/updates/2011/8/18/sk-optiontrader-generates-a-profit-of-4346-in-just-14-days.htmlhttp://www.skoptionstrading.com/updates/2011/8/18/sk-optiontrader-generates-a-profit-of-4346-in-just-14-days.htmlhttp://www.skoptionstrading.com/updates/2011/8/3/us-yield-curve-flattening-to-prompt-fed-easing-and-1800-gold.htmlhttp://www.skoptionstrading.com/updates/2011/7/18/decline-in-us-real-rates-to-send-gold-past-1800.html


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By far our worst performing trade of the year, and in fact in the history of this service, was our

holdings of SLV calls which were obliterated when the floor fell out of the silver market in

September. We were all but wiped out on two trades, both of which were $50 Jan-12 SLV calls with

5% of our capital allocated to each. We make no excuses and wrote to subscribers saying:

We have decided to book the loss on our SLV Jan 21 '12 $50 calls, selling our entire remainingposition for $0.15.

The time decay on these calls now means that even if silver prices could stage an impressive rally, the

positive effect of this would likely be cancelled by the Theta.

Although we were slightly blindsided by the CME margin hikes, we are not going to blame them for

what happened. We were simply wrong on this one. Losses have to be taken from time to time and

unfortunately this is one of those times.

During late November we wrote a full piece detailing what we think are theproblems with the CME

system and how they should be resolved, as changing margin requirements were creating much

uncertainty in the markets. We viewed the margin hikes as completely unnecessary. Keep in mind

that margins had not been reduced after the massively volatile May correction, and yet the CME feltthey needed to be increased from those already high levels despite volatility now being much

lower in silver. We are of the opinion that the discretionary manner in which the CME alters margins

requirements add instability to the market.

We also took a hit on some GLD calls we were holding, booking losses of 78% and 83% on Mar-12

GLD $210 calls. These were speculative trades and therefore we only allocated 5% of our capital to

them, but nonetheless it is always disappointing to make a loss.

On our brighter note, having taken advantage of the correct in gold to sell put spreads, on November

19th our GLD Nov 19 '11 $150/$149 Vertical Put Spread position expired worthless, allowing oursubscribers to collect themaximum profit of 35%.
http://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.htmlhttp://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.htmlhttp://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.htmlhttp://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.htmlhttp://www.skoptionstrading.com/updates/2011/12/2/more-gains-for-sk-optiontrader-subscribers.htmlhttp://www.skoptionstrading.com/updates/2011/12/2/more-gains-for-sk-optiontrader-subscribers.htmlhttp://www.skoptionstrading.com/updates/2011/12/2/more-gains-for-sk-optiontrader-subscribers.htmlhttp://www.skoptionstrading.com/updates/2011/12/2/more-gains-for-sk-optiontrader-subscribers.htmlhttp://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.htmlhttp://www.skoptionstrading.com/updates/2011/11/23/silver-margin-requirements-how-the-cme-system-increases-vola.html


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With a further drop in gold prices we chose to sell GLD Dec 17 11 $165/$160 vertical put spreads (a

bullish play) for a $1.87 net credit with 10% of our capital allocated to this trade on November 22nd.

Just 2 weeks later, on December 6th, we closed this position at a price of $0.74 for a 22.6% gain.

Our last position to be closed in 2011, was our GLD Dec 17 11 $165/$160 Vertical Put Spread. This

was opened for a net credit of $1.13 on July 18th

, and expired worthless on December 17th

for a

maximum profit of 22.6%.

Overall in 2011, our model portfolio increase 40.95% with an average return of 20.57% in 59.41

days.

The Value Of Our Service

In our opinion the value of information is the probability that the information will change ones

action, multiplied by the expected benefit that one would get from changing ones action.

Our focus is on delivering results as that is how we believe we can best deliver value to our

subscribers. Our update and trading signals are usually brief and concise, since we do not see the

added value of flooding our subscribers with mountains of data, research and reports that do not

contribute significantly to the actual value our service. We keep our trading signals clear and concise

and make no attempt to bury them in a haystack of other information for our subscribers to sift

through.

We continually perform extensive research and analysis on the financial markets and a great deal of

effort goes into designing each of our trades. However it is our job to sift through the myriad of data

points and reports, not the job of our subscribers. We provide trading signals based on our analysis.

These trading signals is where 99% of the value of our service, and in fact any similar service, is

contained. All else is just noise and designed to create an impression of value for, without actually

providing value.

So what is the value of our service to you?


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Well to each subscriber it will be different. We suggest using the formula detailed above and one

only has to ask oneself two simple questions;

1. If you subscribe to our service, what are the chances of you actually following our trading signals?

2. If you choose to follow our trading signals, how much capital would you commit?

For example, say you think that you have a 50% chance of following our signals and have decided to

commit $20,000.00

In which case the value to you of our service in 2011 was as follows:

Our model portfolio return for closed trades in 2011 was 40.95%. That means $20,000 in our model

portfolio would have grown to $28,190. Therefore the profit made was $8,190, this is the benefit to

you. However you only gave yourself a 50% chance of following our model portfolio so that means

the value of our service was $4,095 and yet it only costs $349 per year. So the return on our letter

is 11.73 times the fee paid.

That is why we continue to believe that we are providing good value for money in the service we

provide.

Finally we would like to take this opportunity to thank our subscribers for their custom, loyalty and

understanding through this turbulent trading year. We feel incredibly proud and privileged to have

such a diverse range of people as a subscriber base, consisting of experienced trading professionals

to part time traders who are learning the ropes, residing in all corners of the globe.

Your questions, comments and feedback have allowed us to continually improve our service for

which we are extremely grateful.

Note:

Changes to our Calculations of PnL on Short Spread Trades
http://www.skoptionstrading.com/updates/2012/1/8/changes-to-our-calculations-of-pnl-on-short-spread-trades.htmlhttp://www.skoptionstrading.com/updates/2012/1/8/changes-to-our-calculations-of-pnl-on-short-spread-trades.htmlhttp://www.skoptionstrading.com/updates/2012/1/8/changes-to-our-calculations-of-pnl-on-short-spread-trades.html

Documents

Skot 2011 Report