Let's say I'm a commodities trader, and Jesus Christ himself has just told me that gold is about to become much, much more valuable. We'll leave the debate on whether that's insider trading to another day :)

I have any number of ways to invest in gold. I could trade gold directly on COMEX, buy futures and other options on their respective exchanges, or perhaps diversify off the commodities market entirely by investing in stocks of the largest producers of gold — Newmont Goldcorp comes to mind. But considering Jesus himself gave me this advice, I want to maximize my return.

Depending on which margin accounts I hold at my respective brokerages, I could increase my returns a few times using leverage. I could also borrow privately and use the borrowed money as collateral to increase my leverage. Not a very good move under normal circumstances, but considering the big man himself said so, let's do it.

But each of these approaches only linearly multiplies my returns, and I want to go exponential if possible. If the value of gold doubles, I want my principal to quadruple. If the value of gold triples, I want my principal to increase nine-fold. Given my confidence in the investment, I'm more than willing to accept equally exponential losses should gold decrease in value.

What options are there for such a hypothetical investment?

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    Insider trading is legal in commodities. In fact, it is presumed to happen. That is why it is such a dangerous field to play in. Some actors actually know the approximate outcome and they are glad to take bad bets. – Dave Harris Sep 14 '19 at 18:48
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    That is not exponential growth, that is polynomial growth. – Dave Harris Sep 14 '19 at 18:50
  • @DaveHarris I chose the term exponential as more approachable to future readers than polynomial, though the true request is for superlinear growth – Tal Sep 14 '19 at 19:32
  • The Subject is more broad than the Question. – RonJohn Sep 14 '19 at 20:24
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    Doubt I'd trust Jesus with financial advice.... his main theme was "give all your wealth to the poor".... – xyious Sep 16 '19 at 15:56

Since you have a direct line to Jesus, you need one more piece of information to finalize the strategy. What's the timeline for this?

As a trader, you're allowed 4:1 intraday for equities but that doesn't help you over the long haul. Portfolio margin allows a higher degree of margin but that's a bit complex to describe. Standard Reg T margin is 50%. As share price increases (Newmont Goldcorp?), margin increases, creating excess margin (SMA). This creates excess loan value which can be used to buy more NEM.

At 50% margin, you can buy more NEM at 2x the SMA (SMA/50%). So for every 10% increase in share price, in dollars you get to buy 10% more dollars worth of shares but since share price is 10% higher, you only get 91% of 10% in shares (yeh, I know, this is confusing). IOW, as share price increases, you're buying fewer and fewer shares across the increase. While this is all fine and dandy as a money maker, it's not going to provide the exponential return that you seek.

Getting back to your latest convo with Jesus, if this big move in gold is going to be long term, this could be a problem. For example, gold doubled in a year in 1979-ish. No problem working with that timeline. Some later doubles took 3 years (2003 and 2006) - eh, not so easy. If it's going to be shorter term, say spread out over less than a year then the answer to your question is out-of-the money options. They provide leverage.

Call options will do the trick. As the underlying and your calls appreciate, continuously roll them up and out, pyramiding your profits into a larger and larger position, thereby leveraging the leverage.

20+ years ago I has access to a program called Optionvue. If you inputted the target price and the date, based on the quotes in the current option chain, it calculated which option would give you the most bang for you buck. I'm not talking about a mere tripling as you request. I'm talking about Praise the Saints, you're filthy rich.

But now, it's time for a dose of real life reality. This is curve fitting based on known future facts and maybe your conversation with Jesus is just a dream :->)

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As a margin account grows in value then larger positions can be taken.

Forex position sizes are available in steps of 1000 . Futures contracts are sometimes available in more than one size. Brokerage accounts can add positions smaller than lots of 100.

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The answer is approximately "no," for a private investor. There would be a way to mimic your goal of polynomial revenue using options contracts but your net revenue would be less than simply buying plain vanilla at the money calls on futures contracts.

As a guess, your profit-maximizing strategy, because you know the outcome, would be to buy short-dated slightly in-the-money calls on futures contracts. The trade-off between moneyness and uncertainty should be optimal with slightly in-the-money calls, although it could go the other way.

If you also knew the time period, then finding the profit-maximizing cash flows are a trivial task in excel.

EDIT The reason linear growth is maximizing is that lines exceed polynomials and exponentials over all relevant ranges. Also note that linear growth is exponential if this were a repeatable strategy. x(t+1)=Rx(t)+e(t) as a difference equation is an exponential equation in continuous time except where R=1. I cannot prove this here as this forum does not allow mathml.

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  • "I cannot prove this here as this forum does not allow mathml." — I'd really love to see the math if you've got it on hand – Tal Sep 19 '19 at 23:12

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