Karim Rahemtulla (Investment U):
Of all the great investments you could have made in 2009, gold is right up there among the best of them.

The price of gold has surged this year, taking gold shares upwards with it. Readers of my Xcelerated Profits Report have rung the register with 45% profits on Goldcorp (NYSE: GG) and a triple-digit winner on Golden Star Resources (NYSE: GSS). We’re also up big on Yamana Gold (NYSE: AUY) at the moment.

All is good, right?

On the surface, perhaps. But not if you believe what the options market is saying…

Yamana Options Signal a Share Price Drop

Using Yamana as an example, the options market is betting that over the next 12 months or so, Yamana may fall from current levels of around $13 back into the single digits again.

Just take a look at the January 2011 $7.50 put options (the right to sell Yamana shares at $7.50), currently trading at $0.70 cents per contract. This means the put buyer thinks Yamana’s price will fall to $6.80 – almost 50% below current levels – in order to be in the money. The $6.80 price is derived from subtracting the price of the option from the strike price ($7.50 minus $0.70 = $6.80). This tale is similar across other gold shares, too.

These put options are expensive relative to Yamana’s share price – the result of gold prices moving sharply in previous weeks and causing the volatility in gold stocks to increase.

As a quick refresher, the price of an option is based on four major factors:

The price of the underlying shares
The options strike price
The time to expiration
The volatility of the underlying shares
Two Ways to Play Gold Prices… But Only One Viable Option

So if you’re a gold investor looking to participate in the market, what can you do to protect your profits, or buy shares at a lower price? Here are two potential ways…

Click here for the rest of Mr. Rahemtulla’s Analysis at Investment U.

This simple technique will save you a fortune if you apply it to your investments. We’re talking about asset allocation. Let us explain… Playing the markets means you must accept an ever present degree of uncertainty. 

Stock picking and market timing, two important techniques to master if you want to make money by investing, come down to what is essentially guess work. Every day we “guess” what stock or security will rise or fall at a particular time. Great investors may be right 60% of the time. But the point is we can’t rely on being right; we can only trust our research and market insight.

This is where asset allocation, or portfolio management, comes in. Asset allocation allows us to minimize risk and maximize profits by rebalancing your portfolio. This means diversifying your investments across different asset classes.

According to our friends at Investment U, a smart way to effectively allocate your portfolio is to follow the model below.

We see this played out everyday as more brokerage firms struggle to survive and unfortunately, we see folks like Madoff facing serious charges.

Here’s how you can take control of your investments:

1.    Understand what the market is doing.

That’s first and foremost. You can invest in a good stock that’s breaking out of a set-up, but if the market direction isn’t behind you, it’s like riding a bike into a fierce wind. You must understand where the market is and where it’s likely to go in the short-term. Then, invest in the best set-ups that will be helped by the market direction. It’s much easier to ride a bike with the wind at your back.

2.    Trade only the best set-ups.

Let’s take a look at NVEC, which triggered a long-side trade last week…

When a stock is moving higher, it doesn’t go straight up. Instead it rises, then has mini-downtrends where it consolidates its gains before moving higher. These mini-downtrends are where it pulls back off of its highs in an orderly manner — often to an area of key support such as its upward trend line and/or 50-day moving average.

We connect the lines of the mini-downtrend. A break above the pink line triggers a trade on the long side. For that reason, NVEC was an ideal long side set-up last week:

On Tuesday morning, NVEC triggered a trade by breaking above the pink line.

By Tuesday’s close, we were already enjoying a gain of 5%. And Wednesday morning, we locked in gains of 8.9% — a nice gain in today’s market in just over 24 hours.

This leads to step #3.

3.    Take your profits when you have them.

While on the surface, a 9% gain may not seem like much, I have to tell you that if you just did one trade like that a week, you’d significantly outperform most brokers, money managers and mutual funds. After all, most of these money handlers are nothing but “Managing To A Benchmark” cookie-cutter indexers that know how to sell but not how to manage. Have you seen what the indexes and mutual funds are down year to date? If your traditional account mimics the indexes, you know you’re working with one.

Just think about it. Let’s say you have a portfolio of $50,000. And you invest in 200 shares of NVEC at 28.22. After selling it at $30.74, you’ve made a profit of $504. Multiply that by 52 and you have a one-year profit of $26,208 or 52%! And that’s just from doing one trade like NVEC a week.

What would a one-year gain of $26,208 do for you? Well, it would easily put you well ahead of what most brokers could do for you.

Stocks may continue to go in the direction we want after we take profits. But for the time being, you are never going to go wrong ringing the register on short-term gains. For example, what if we didn’t lock in our NVEC gains at $30.74? Our gains would have been gone as the stock went right back to where it was when it originally triggered.

Now don’t get us wrong. We aren’t out to get brokers. We know a lot of them and many are very good. But the point we are trying to make is the days of handing your money over and expecting a traditional Wall Streeter to perform are over. To be successful, you have to be in control of your investments. After all, only you have your best interests at heart. As good as your conventional Wall Streeter may be, he’s not able to watch your investments as good as you can.

Source: Quicker, Safer Trades Every Week