Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Buying Silver is Easy With This Options Trading Strategy

Commodities / Gold and Silver 2012 May 24, 2012 - 07:30 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleLarry D. Spears writes: As last week's Money Morning special report pointed out, the long-term fundamentals for silver prices are decidedly bullish.

However, in today's volatile market, picking the right time to buy silver is something of a guessing game.


But if you are familiar with options, you can let them be your guide in learning precisely when to buy.

And here's the best part: This option trading strategy will only cost you a few dollars.

It works with either options on silver futures - e.g., the standard 5,000-ounce Comex contract, recently valued at around $140,000 - or any of the much more affordable silver-based exchange-traded funds (ETFs) on which options trade.

Taking the Guesswork Out of Silver Prices
For ease of explanation, I'll base our example on the iShares Silver Trust ETF (NYSEArca: SLV), recently priced at $27.34. For comparison purposes, the price of a single SLV share typically tracks the price of one ounce of silver, but is usually 75 to 80 cents lower.

Here's what you do:

•BUY an out-of-the-money call option with a strike price $1.00 to $1.50 above the current price of the underlying SLV shares and an expiration date three to six weeks out. In this instance, with SLV at $27.34, that would mean buying a June $28.50 call, priced at about 44 cents a share, or $44 for the full 100-share contract.
•You would also simultaneously SELL an out-of-the-money put option with the same expiration date and a strike price a dollar or so below the current SLV share price. In this instance, that would mean selling the June $26.00 put, priced at about 40 cents, or $40 for the full contract.

The cost of the combined position is thus just 4 cents, or $4 total.

For simplicity's sake, I'm using single options in the example. In practice, you'll buy and sell one option pair for each 100 shares of SLV you want to purchase, and the cost will rise proportionately.

You will also have to post a margin deposit to cover the sale of the short put. In this case, that would be about $412 - but you'll get it back unless the put is exercised and you get to buy SLV at $26 a share.

And what do you get for your $4?

Quite simply, you get a position that takes the guesswork out of the decision to buy silver - or, in this case, shares in the SLV silver ETF - and cushions you against limited short-term volatility.

Between now and the June 15 option expiration, SLV share prices can fluctuate all they want between $26 a share and $28.50 a share, and it won't affect you one way or the other.

You can just calmly sit and watch, waiting for silver prices - and SLV - to make a more decisive move.

If it does, one of two things will happen:

•SLV will break out of the recent trading range to the upside, moving above $28.50 a share. You can then exercise the call and buy the shares at that price - regardless of how high SLV's price might have moved above that level. (Alternatively, you can simply sell the call just prior to expiration.)
•SLV will fail in its next rally attempt, with the price turning lower and falling below $26.00 a share. The put will thus be exercised and you'll have to buy SLV at that price - a substantial bargain over what you'd pay if you merely bought the shares today. (Again, if you prefer, you can just buy back the put shortly before expiration.)

Either way, you'll have avoided a lot of anguish over when to buy and whether you've made the right decision.

Plus, as Table 1 illustrates, if silver prices rally substantially, you'll make almost as much profit as if you'd laid out the $2,738 to buy the actual shares in the first place - and your return will be far, far higher.

Breaking Down the SLV Trade
For example, if SLV rose to $35, you'd make $766 in profit, or 28.0% on the shares.

But, on the option combo, your profit would be $646 (reduced by the out-of-the-money amount of the call, and the cost of the combo) - an incredible gain of 16,150% on your $4 cost.

Even if you count the $412 margin deposit as part of the cost, the return is still a whopping 155.2%.

Even better, if silver prices fall and SLV drops below $26.00 a share, your loss is actually $130 less than if you had purchased the ETF itself - simply because you avoid the entire decline from $27.34 to $26.00.

And, if silver goes nowhere, you're out ... yeah, four bucks.

As noted earlier, this play can be used with any number of options on SLV or the other silver-linked ETFs that have options, as well as with the options on the Comex futures, though the numbers - cost, reward and risk - will be substantially higher with those.

Be aware as well that the selection of option strike prices should involve a little more analysis than the generic guidelines offered here.

In reality, if you plan to seriously utilize this strategy with silver - or any other stock or commodity - you should first examine a technical chart for the underlying security, then buy calls with strike prices just above primary resistance levels and sell puts with strike prices just above major support.

That way, you'll be buying the underlying security only on a confirmed breakout, or at a bargain point where the price is unlikely to go much lower.

[Editor's Note: I've seen firsthand over the years just how few people really understand what options can do for them.

That's why we've spent the past few months creating an exclusive investor's guide called "The Power of Options." It's ready for you today. And it could be the most important thing you read all week.

The best part is we are giving it to every single subscriber for free.

It's a guide created purely as a service for our readers. I hope you enjoy it. To access your free investors guide, click here. ]

Source :http://moneymorning.com/2012/05/24/is-facebook-nasdaq-fb-a-replay-of-the-aoltime-warner-deal/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in