A Potential "Big Trade" That Will Put George Soros to Shame

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Many investors dream of making the "big trade."

Spurred on by stories of fabled investors who accumulated generations of wealth with just one big trade, they talk incessantly about what they could or should have done.

But actually doing something about it pays better.

Consider George Soros, who reportedly made $1.1 billion in a single trade against the Bank of England by shorting the British pound on September 16, 1992. Or Jessie Livermore, who reportedly made $100 million on October 24, 1929 – Black Thursday. Or how about Jay Gould, who tried to corner the gold market on September 24, 1869. Nobody knows exactly how much Gould made but he left his children $77 million when he died in 1892.

Well, if you have the guts, now is the time to make your move, because I think the next "big short" is already out there. In fact, judging from open interest I'm seeing on gold puts and VIX puts, I'd bet on it.

Right now there are literally tens of thousands of contracts open on both at various strike prices, so the odds are good that somebody – perhaps a group, a hedge fund, or another big money player – is placing highly leveraged bets that things will reverse.

With the proper structure, these trades could dwarf the bets made by Soros, Livermore, and Gould.

Certainly, all of the conditions are there.

We've had several days of pure panic buying. Gold prices are up 25% so far this year and up 90% in the past two years.

The public is buying and, late night commercials aside, it's clamoring for gold in a way that makes me nervous. Meanwhile, politicians in Washington actually believe they understand the risks associated with credit default swaps and sovereign debt – and that practically guarantees that they don't.

But what really gets my attention, and gets my greed glands going, is that Washington is now going to "do something." As if the government hasn't already "done" enough.

That means another bailout or stimulus is imminent. It also suggests that there will be a corresponding sigh of relief, a decline in volatility and a drop in gold prices.

Then all hell will truly break lose.

But that won't matter because the damage will already have been done and the profits will already have been banked. Book deals will have been struck and we'll have a whole new generation of motor mouths at the country club who talk about how "they could have made the trade, too, if only…"

If you want to play along, here's what to do.

  • Buy out-of-the-money SPDR Gold Trust (GLD) put options. Because you are buying them, your risk is limited only to what you spend to purchase them.
  • And buy out-of-the-money iPath S&P 500 VIX Short-Term Futures (VXX) put options. Here, too, your risk is limited because you are buying the options rather than selling them.

But remember, DO NOT invest money you cannot afford to lose completely. Nothing is guaranteed.

Soros, Livermore, Gould and Paulson knew what they were doing when they placed their bets and were prepared for the consequences. You should be, too.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. fallingman | August 12, 2011

    Jeez, while I can't argue with the trades per se…as trades…it's a question of where do you focus your attention and how do you spend your emotional capital.

    Gold will likely have a sharp and QUICK selloff at some point. Is it now? Or is it just after your puts expire? And, more to the point, the long term trend in gold is up. It's fine to speculate on a short term move, but for god's sake, don't disturb your long hedge position. You do have one, don't you?

    This is not a trade for amateurs looking to get rich quick. The worst thing that could happen is that you make money on this trade, think you're a genius and continue to buy options. BUYING options, except for protection, is for chumps in the long run. Selling options is where you make the money.

    Which would you rather be, the house of the gambler…the chump or the casino? Don't be bamboozled by promises of a quick score. Things have a way of not working out according to the script. But if you do put on these trades, good luck. I'd like to buy gold lower.

  2. TED THURMON | August 12, 2011

    You did not indicate the strike prices on these put obtions

  3. Harrison Kornfield | August 12, 2011

    "Out of the money" — further define, please. How much "out" and for what length of time? Otherwise, the advice is gibberish. With respect.

  4. Ari Gold | August 12, 2011

    Hi Keith Fitz-Gerald, Chief Investment Strategist,

    Yes, please short gold and encourage your clients to sell. I will buy more at a lower price & you can keep your Zimbabwe inflation dollars which are getting more and more worthless by the day.

    I can't thank you enough bro.

  5. micheal horswell | August 12, 2011

    I'm a paid up subscriber to a number of your services and i'm not really versed in placing puts or trading options.I tend to agree with Falling man, Ted Thurmon and Harrison Kornfield that (and especially for someone in my position)not only is your advice very short on specifics it could be downright suicidal .

    Well,Keith?And also with respect.

  6. Razr | October 4, 2011

    2 months dow the road and after operation twist, gold price has dropped. You could have gained money by purchasing the out of money option Keith recommended.

    Cheers all!

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