It is impossible to be in this business and avoid the hype about how silver is “poised” to “explode” to “massive new highs”, ala the great spikes in 1980 or 2011 when silver rallied to, well, massive new highs.
And it all sounds exactly like hype and pretty far-fetched at times. Still – it has happened twice before. So anything is possible. The next question then is “what to do about it, if anything?”
Figure 1 displays a monthly chart for silver futures going back to the 1980’s and Figure 2 displays a monthly chart for ticker SLV – an ETF that tracks the price of silver bullion.
Figure 1 – Silver futures monthly (Courtesy ProfitSource by HUBB)
Figure 2 – ETF ticker SLV (Courtesy ProfitSource by HUBB)
Sounds like a sucker bet, right? And besides, what if I place a big bet on silver soaring and it tanks instead? Yeah, on the face it, it all seems like a pretty silly idea.
But here’s a question to ponder: What if you could risk $56 just on the off chance that silver makes a seriously large move – either up OR down – between now and January of 2021? Is that worth considering?
Well, that’s not for me to say. But let me show you what I am talking about.
SLV Example
Figures 3 and 4 displays the particulars and risk curves for a trade using options on ticker SLV as follows:
*Buy 1 Jan2021 SLV 23 call @ $0.62
*Sell 1 Jan2021 SLV 30 call @ $0.30
*Buy 1 Jan2021 SLV 13 put @ $0.24
Figure 3 – SLV option trade details (Courtesy www.OptionsAnalysis.com)
Figure 4 – SLV option trade risk curves (Courtesy www.OptionsAnalysis.com)
The total cost to enter this position is a whopping $56. So, what do you get for your $56?
*If SLV makes a 2-standard deviation price move sometime in the next 437 calendar days and rises to $26.40, the position will show an open profit of between roughly $175 (+212%) and $260 (+364%), depending on how soon it gets there and implied volatility at the time.
*If SLV rises all the way to its old high of $48.35 the profit would be somewhere between $550 (+882%) and $644 +(1,086%).
On the downside:
*If SLV falls 2 standard deviations to $10.82 the position will show an open profit of between roughly $170 (+206%) and $190 (+239%) – again, depending on how soon it gets there.
*And if SLV falls all the way to its 2008 low of $8.45, the position will show a profit of roughly $400 (+614%).
REMINDER: I am NOT “recommending” this trade. The purpose of this example is simply to highlight the fact that options can allow a trader to “risk a little for the potential to make alot.” Nothing more, nothing less.
Summary
So, is silver likely to make an astronomical move – up or down – between now and January 2021? It beats me. The only question a trader can answer with any certainty is – are you willing to risk $56 while you wait to find out?
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.
