Other Voices: A profitable options play on silver

Jay Soloff discusses a lucrative options trade on silver in the paragraphs below

By Jay Soloff

Do you have a good handle on simple option strategies that can boost your portfolio returns?. '10 Simple Rules To Trade Options Like A Pro*' from Jay Soloff at Investors Alley is a good quick overview on using option strategies to mitigate risk and enhance returns in your portfolio. These strategies are well suited to high beta sectors like biotech where option premiums tend to be large. The report is now available* free via download HERE

Tensions over the trade war with China have become a daily part of the financial news. But, new “developments” in the standoff can still lead to market volatility and the occasional steep selloff in stocks. Most recently, the escalation of tariffs from both the US and China caused a pretty big one-day drop in stocks before a moderate recovery took place last week.

Typically, an upsurge of volatility causes investors to jump to safe-haven investment vehicles. For instance, the last big drop in stocks from a week ago saw a big inflow of cash into utilities stocks. Other common investment safe-havens are bonds, precious metals, and of course, cash.

But taking a look at precious metals over the last quarter, and gold is actually down about 2%. Of course, much of the last quarter was marked by a lack of volatility. The absence of action in stocks likely outweighed any concerns over tariffs or economic woes.

On the other hand, over the same period, silver dropped nearly 7%. Is silver decoupling with gold as a source of safety? Certainly, precious metals don’t carry the allure they once did in terms of safe-haven investments. Gold may still have some cachet, but silver seems to have lost some of its luster.

Well, at least one trader believes silver may still have some upside potential, albeit limited. At the very least, this strategist is using silver to generate a decent sized income, while also implying there isn’t much more downside in the price of the metal.

More specifically, the trade was in iShares Silver Trust (SLV), the very popular ETF for trading silver. The trade itself was a covered call, so SLV shares were purchased and calls were sold against the shares for income.

With a covered call, the call income can be used to generate income on the trade or protect the long shares by lowering the cost basis. For this trade, the shares were purchased at $13.50 and the 15 calls were sold, expiring all the way out in January 2021.

Does that mean SLV isn’t going to break $15 in the next year and half? That’s possibly the case, but the trader may also simply have been seeking a trade which could generate income that didn’t have a lot of long-term downside risk… while having limited upside.

In other words, SLV may climb past $15, but it’s probably not going to $30 by 2021. On the other hand, the covered call trader sold the calls for $1.01, so the shares are protected down to about $12.50. This trade was done 5,000 times, so about $500,000 in premium was also collected from the call sale. In terms of yield, the trade generates 7.5% yield over the course of about 19 months.

While it isn’t a very high yield, it’s also likely to be a very safe yield. It’s almost like investing in bonds. However, the trader can still earn stock appreciation on the trade up to $15. So, there is the potential to make another $1.50 in growth, or 11.1% returns. Combined that’s about 18.6% max return potential over the course of the trade – which isn’t bad at all for what should be a low risk trade.

If you want a long-term, safe income play, this is a decent way to do it. You could also pick a nearer expiration and use the 14 strike, or some similar alteration of the strategy. Either way, it should be a generally low-risk trade.

Comments


Bret Jensen
EditorBret Jensen
alexandra
Editoralexandra
New Comment
1
Bret Jensen
EditorBret Jensen
New Comment
1
alexandra
Editoralexandra
New Comment
Bret Jensen
EditorBret Jensen
New Comment
Bret Jensen
EditorBret Jensen
New Comment