Well as I said here I hope to offer more example option trades as a form of education. I wrote about an example trade using options on JNK here. Now let’s shift our attention to ticker SLV, an ETF that racks the price of silver bullion.
Figure 1 – SLV with low IV and potential double bottom (Courtesy www.OptionsAnalysis.com)
As you can see in Figure 1:
*SLV has taken a beating
*SLV could potentially be forming a short-term bottom (well it could)
*Implied volatility for SLV options is at the low end of the range (which suggests that buying premium may be the best course of action)
As with any trade that attempts to pick a bottom (or top), there are a thousand and one reasons NOT to take this trade (and remember that this is an “example” and not a “recommendation”
The SLV Long Call
In this example we are going to enter a bullish position in SLV options – one that attempts to limit the amount of time premium paid. The example trade involves buying the March SLV 12 strike price call option at $1.34 with SLV shares trading at $13.17.
Figure 2 – Long Mar SLV 12 Call (Courtesy www.OptionsAnalysis.com)
The key things to note:
*The trade involves trading an 18-lot using a limit order to enter the trade at $1.34 (midpoint of the bid/ask spread).
*The cost of the trade – and the maximum risk – is $2,412.
*With SLV shares trading at $13.17, the breakeven price for this trade is just $0.17 higher at $13.34 (strike price of 12 plus option premium paid of $1.34).
*Above $13.34 this trade enjoys point-for-point movement with SLV shares and unlimited profit potential.
This trade is nothing more than rank speculation that the recent low of $13.04 for SLV shares will hold. If that low is taken out in any meaningful way, the jig is up.
There is no “magic number” as to what constitutes a “meaningful” break. But for your consideration, note in Figure 2 that if SLV hits $12.92 then a trader can exit this trade with a loss of somewhere between $400 and $600, depending on how soon $12.92 is hit.
This example SLV trade qualifies as rank speculation as trying to “pick a bottom” is routinely “fraught with peril.” Still, it offers a reasonable tradeoff between potential reward and anticipated risk. In addition, it takes advantage of current low implied volatility levels for SLV options by buying an in-the-money call option and involves paying time premium of only $0.17.
One other thought would be to consider waiting for an actual double bottom to form before considering a position such as this.