A Potential ‘Big Trade’ That Will Put George Soros to Shame

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 Sept. 16, 1992. Or Jessie Livermore , who reportedly made $100 million on
Oct. 24, 1929 Black Thursday. Or how about Jay Gould , who tried to corner the
gold market on Sept. 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 Im seeing on gold puts and VIX
puts, Id 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. Weve 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, its 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 debtand
that practically guarantees that they dont. 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 hasnt already done enough. That means another bailout or
stimulus is imminent. It also suggests 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 wont matter because the damage already will have been
done and the profits already will have been banked. Book deals will have been
struck and well have a new generation of motormouths at the country club who
talk about how they could have made the trade, too, if only If you want to play
along, heres what to do. Buy out-of-the-money SPDR Gold Trust (NYSE: 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 (NYSE: 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.