Since that article appeared in September I since made another 98% (in a one month time period) with the Pair-Trading Strategy. This time it was 149% in a month. Here is how I did it…

Back on April 5th, Gold was 1135.30 per ounce and Oil was 86.69 a barrel. The ratio on Oil to Gold is 13.09 to 1. I’ve always recommended here that when this ratio drops below 13.25 to go long on Gold and short on Oil.

To accomplish this, I bought a July Put on USO (the Oil fund) for $207 a contract. I also bought a June Call on GLD (the Gold fund) for $360 per contract. My total cost is now $207 + $360 = $567 total for one contract each.

Now the June Call is cutting it close, as an option loses it’s time value the fastest in the last month. I really need this investment to hit it’s target before mid May (which is where we are at the time of this writing, so I just made it).

The target of course is when the Oil and Gold ratio is at it’s historic average of 15.7 to 1. On May 6th, the average was 15.53 to 1, and the following day it was 16.13 to 1. May 7th was the day to close the contracts.

I closed the USO contract for $560 and the GLD contract for $850. Total coming back is $560 + $850 = $1410. Since my cost was $567 for one pair of contracts, that is a 149%
return by buying when the ratio is below 13.25 and selling when it is above 15.7.

Now how can you profit off this like I have? Well, you can wait until the ratio is below 13.25 again and do the strategy as I just did.

The other option is to wait until the ratio hits the other extreme of 18.15 and then short Gold and go long with Oil.

How To Pair Trade Oil And Gold

After I revealed this strategy, that investment went on to gain another 73% up to November 27, 2009. That’s 148% in two months for me, but everyone else could have made 73% by following this strategy.

BUT THAT’S NOT ALL!

The ratio of Oil to Gold was once again near it’s lows on October 23rd. Gold was $1,059 and ounce and Oil was $80 a barrel for a ratio of 13.19 to 1. This was the time to play the strategy again.

I bought USOPI for $470 per contract and GCZAY for $450 a contract. Total cost for one contract pair trade is $920.

Today (Nov 27) the ratio of Oil to Gold is 15.5. Almost back to the historical average of 15.7 suggesting the run may be over. If you have been playing this strategy with me, it could now be time to close out this strategy.

USOPI is currently at $525 per contract and GCZAY is $1275 per contract for a total of $1,800. A GAIN OF 96% IN ONE MONTH!

I hope you listened to me and cashed in on this. If you missed it and want to get in on the next one, click this link and take a free trial of my stock trading strategies and stocks picks.

First off, every investor should have an exit strategy BEFORE they buy. This means you have a traget price in mind that you will sell at.

Let’s use Walmart as an example. WMT is currently at $50. If you look up WMT on Yahoo Finance you will see they have set a one year target price of $60.

OK, so you plan to buy WMT at $50 and sell at $60. A typical investor after buying WMT may set a Limit Order with their broker to sell WMT should it hit $60. Or, they may monitor the stock and sell manually at $60. Both of these methods are OK if you want a $10 profit, but I must warn you, you are leaving money on the table.

You can take that same trade (buy at $50 and sell at $60) and get $12 per share profit instead of $10. That’s an additional 20% profit!

Once I explain this you will probably never sell your stock the traditional way anymore.

Let’s say you are buying 100 shares of WMT at $50 per share. After you buy, go and sell a Call option on your 100 shares. If you feel the stock will hit $60 in one year then use those figures for determining the Call option to sell.

For example, WMT has an option that expires in January of 2011, with a strike price of $60 (symbol is VWTAL or VWTAL.X on Yahoo).

What this means is that there are investors out there who are are willing to pay you $2.20 per share to buy WMT from you at $60 (the price you wanted to sell at anyway).

If WMT hits $60 or more and the other investors decides he wants your shares now for the $60, then your broker will transfer your shares to the other investor and give you $60 per share, just as if you had sold it but no action is required on your part. If the stock never does hit $60, you get to keep the suckers (err.. the other investors) $2.20 per share!

That’s how to turn a $10 profit into a $12 ($10 on the stock plus $2.20 on the option) profit. Enjoy.

For more ways to trade stocks and options, click here for a free trial and I’ll show you many more strategies for trading stocks.