NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS

One of the best ways to play gold is with NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, a 3x leveraged ETF.  The full details are on the Direxion website (the sponsor of the ETF).  Here’s their overview:

The Direxion Daily Gold Miners Index Bull and Bear 3x Shares seek daily investment results, before fees and expenses, of either 300% or 300% of the inverse (or opposite) of the performance of the NYSE Arca GoldMiners Index. There is no guarantee the funds will meet their stated investment objectives.

These leveraged ETFs seek a return that is 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day.

The NYSE Arca GoldMiners Index will change it’s components over time, but it’s comprised of the “big names” in gold, like:

The index is heavily weighted towards Canada (over 50%).

(Note that NUGT is a bull play.  The opposite security is DUST, which aims for three times the leverage on the downside, so if you expect gold to drop in the short term, buy DUST.  Personally, I’m not smart enough to pick the tops and bottoms, so I just stick with the long play, because I believe gold is in a bull market in 2016).

In summary, the goal of NUGT is to respond with three times as much leverage as the underlying basket of stocks.  So if the basket of stocks goes up 1%, NUGT should go up approximately 3%, in a single day.  That’s a key point: this is not a long term investment: they are using options and other strategies to achieve that 3 times leverage; they can do it for a day, but not for a longer time period.  Over time, options values erode, and of course there is a gross expense ratio to manage the ETF of just over 1%, so there will be return erosion over time.  That’s why I treat this as a short term play only.

How to Play NUGT

My strategy is simple.  NUGT is a short term play.  I want to be in and out in a week or less.  I watch it, and buy when it’s at the bottom of it’s short term trading range, and sell once I’ve made a decent profit.

Sounds simple, but in practice it’s tricky, because it is only with the benefit of hindsight that you can determine the upper and lower bands of a trading channel.  See the next section for an illustration.

History of my NUGT Transactions

To see this strategy in action, here are my actual transactions, as they happened.  Some caveats:

  • For March through July the trade dates are actually the settlement dates from my brokerage statements, so the actual trades occurred 2 or 3 days earlier;
  • The profit is profit per share; the profit on invested capital is the profit divided by the average purchase price, so in April the profit was $18.76, and the average share purchase price was $68.64, for a calculated profit of 27%.  This is a somewhat fictitious number, because it doesn’t take into account undeployed capital, or marging requirements, which would change the number, so it is presented as a guide only.

NOTE: Direxion executed a 1 for 5 forward share spilt for Direxion Daily Gold Miners Index Bull 3x Shares (NUGT) on August 25, 2016. Full details here. As a result, one of the old shares became 5 of the new shares.  All numbers presented below prior to August 25, 2016 are the OLD shares.

March 2016 – profit of $32.45 or 60% on invested capital

  • March 1, buy for $57.60
  • March 7, buy for $53.68
  • March 8, sell for $62.50, profit $4.90
  • March 9, sell for $69.65, profit $15.97, all positions closed
  • March 14, buy for $52.50 and $53.71
  • March 18, buy for $54.26
  • March 21, sell for $64.96, profit $11.58, all positions closed
  • March 30, buy for $52.30

April 2016 – profit of $18.76 or 27% on invested capital

  • April 1, sell for $62.95, profit $10.65, all positions closed
  • April 6, buy for $54.91
  • April 8, sell for $55.25, profit of 34 cents, all positions closed
  • April 18, buy for $81.54
  • April 19, buy for $72.74
  • April 22, sell for $85.80, profit of $7.77, all positions closed
  • April 27, buy for $87

May 2016 – profit of $47.41 or 51% on invested capital (but this overstates the profit, since at the end of the month I was holding a large position, under-water)

  • May 3, sell for $100, profit $13, all positions closed
  • May 4, purchased at $92.35
  • May 6, sold for $109.50, profit $17.15
  • May 9, buy for $90.75
  • May 11, sold for $100, profit $9.25
  • May 12, buy for $99.20
  • May 16, sell for $107.71, profit $8.01

Then I got greedy, and bought far too early.

  • May 17, bought for $105.55.  That’s not much lower than I just sold for.
  • May 17, later in the day, it started to run, I didn’t want to miss the run, so I bought more for $113.97
  • Then the crash, so I averaged down, on May 18 buying more for around $86.60
  • Still going down, so a final averaging down by buying more on May 25 for $73.
  • The result: I now have a very large position with an average cost base of $93

June 2016 – profit of $32.48 or 33% on invested capital

  • June 3, I sold 30% of the position at $93, then 20% at $95.31, and the final 50% at $95, for an average selling price of around $94.46.  All of that work, and massive risk, for a profit of$1.46 over more than two weeks.
  • June 17, buy for $98.51
  • June 20, sell for $109.88, profit of $11.37, all positions closed
  • June 23, buy for $96
  • June 29, sell for $115.65, profit of $19.65, all positions closed

July 2016 – profit of $12.50 or 8% on invested capital

  • July 12, buy at $154
  • July 13, sell at $164, profit $10, all positions closed
  • July 14, buy at $168.40 and $162.70
  • July 15, buy at $152 and $163 and $160
  • July 18, sell at $162.50, profit of $2.50
  • End the month with a significant position, under-water

August 2016

  • August 3, sell at $162.20
  • August 2 trade date, August 5 settlement date, sell at $171.84, profit of $12.80, all positions closed, and lesson learned: Don’t get an itchy trigger finger and buy at high prices, and keep some cash on hand to average down.
  • August 5 trade date, buy 20% of full position at $158.35 and another 20% of full position at $155.20
  • August 10 trade date, sell at $172.21 and $172.60, position closed, profit of $15.62
  • August 22 trade date, purchased 10% of position for $140.70
  • August 22, purchased 10% more for $141
  • August 24, purchased 50% of a full position for $126
  • August 24, as the crash happened, purchased another 10% of a position for $106.
  • NOTE: On August 25, 2016 there was a 5 for 1 forward stock split, so the stock traded at 1/5 of it’s former value, but I had 5 times as many shares.
  • By the end of August I had almost a full position (about 90%), at a post split average cost of $25.58
  • Bought a few more shares on September 9 to lower my average cost to $25.35

I will occasionally update the trading history with more information.

The key lesson is that you want to always have cash or margin available, so that if you guess wrong you can average down and wait for a higher selling price.