On April 1 in this article I wrote about the potential for silver (using the ETF ticker SLV) to make a big move. I also admitted that I wasn’t really sure which way that move would be. As a result I highlight an option strategy designed to play that very situation – a long straddle.
In the original article I highlighted a position as follows:
*Buy SLV June 17 calls @ $0.61
*Buy SLV June 17 puts @ $0.57
For purposes of this update we will assume that a 20-lot was purchased at a cost of $2,360 (($61 + $57) times 20). The original risk curves appear in Figure 1.
Figure 1 – Risk Curve for original 4/11 SLV Jun 17 straddle (Courtesy www.OptionsAnalysis.com)
(See also It’s Soon or Never for Bonds)
From there SLV advanced for two days before reversing. As I write SLV is on its 13th (!!!) consecutive down day. Figure 2 displays the action through yesterday’s close.
Figure 2 – Risk curves as of 5/3 (Courtesy www.OptionsAnalysis.com)
At this point the original straddle is sitting with an open profit of $560, or +23.7% of the original cost. It is time to “do something” with this position.
Choice 1: Take a Profit
An excellent choice. 13 days in a row in one direction is very rare and SLV is at a key support area. So it makes sense to take a profit and avoid giving money back if and when silver eventually bounces. Closing out the whole position would result in a profit of +23.7% in 22 calendar days.
Figure 3 – Current SLV Jun 17 straddle (Courtesy www.OptionsAnalysis.com)
Choice 2: Continue to Play the Bearish Side
Perhaps you want to take a profit but think that SLV may break down through support and plunge much further. One answer would be as follows:
*Sell 20 SLV Jun 17 calls
*Sell 20 SLV Jun 17 puts
*Buy 2 SLV Jun 16.5 puts
The risk curves appear in Figure 4. This position locks in a minimum profit of $366 but still allows for additional profits to accumulate if SLV continues to plunge.
igure 4 – Adjusted Bearish SLV position (Courtesy www.OptionsAnalysis.com)
Choice 3: Reverse and Play the Bullish Side
Perhaps you want to take a profit but also think that SLV may hold at support and reverse sharply to the upside from its current deeply oversold level. One answer would be as follows:
*Sell 20 SLV Jun 17 calls
*Sell 20 SLV Jun 17 puts
*Buy 2 SLV Jun 15 calls
The risk curves appear in Figure 5. This position locks in a minimum profit of $380 and allows for unlimited profit potential if SLV reverses and rallies sharply to the upside.
Figure 5 – Adjusted Bullish SLV position (Courtesy www.OptionsAnalysis.com)
(See also Four Things to Watch for Warning Signs)
Summary
There are no “right” or “wrong” answers here, only choices. The key point to remember here is that a straddle position is not meant to be held forever. Once a solid profit presents itself it is typically time to “do something.”
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
