Back in November 2019, I wrote this article regarding ticker SLV – an ETF that tracks the price of silver bullion. The idea was to enter a very low dollar cost position in case something “big” happened in silver. The expectation at the time – in all honesty – was that silver might “explode” higher prior to January 2021.
Well, the bad news is that things did not work out that way.
The good news is that that turned out to be OK, and now would probably be a time to consider taking a profit.
The Original Position
*Figures 1 and 2 display the original position, which involved buying a far out of the money call and put and selling and even further out of the money call.
*The total dollar risk on a 1-lot was $56
*The position had the potential to make a lot of money if silver rallied or declined sharply, and/or if (spoiler alert) implied volatility soared somewhere along the way
Figure 1 – Original position (Courtesy www.OptionsAnalysis.com)
Figure 2 – Risk curves for original position (Courtesy www.OptionsAnalysis.com)
The Current Status
*SLV has since plummeted from roughly $16.56 to under $12 a share
*AND implied volatility has “spiked” higher. This spike serves to inflate the time premiums built into the longer-term options used in the trade
Figure 3 – SLV tanks, IV spkies (Courtesy www.OptionsAnalysis.com)
Figures 4 and 5 display the current status of this position.
Figure 4 – Current position (Courtesy www.OptionsAnalysis.com)
Figure 5 – Current risk curves (Courtesy www.OptionsAnalysis.com)
As you can see, thanks to the plunge in price and the spike in volatility, this hypothetical position would be sitting with a profit of +337%.
There are many ways that a trade with a profit like this could be adjusted to “lock in a profit and let the rest ride”. However, volatility spikes tend not to last forever, so this would be a reasonable place for a trader holding this position to “take the money and run.”
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed 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. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
