In a previous article, I had suggested that shorting silver was a trade that had a very appealing risk/return tradeoff. I suggested that silver was in a very clear downtrend and coupled with possible bad news out of Europe, shorting it through the iShares Silver ETF (SLV) was likely to be profitable.
Back then, SLV was trading near $30. My target for the trade was SLV at $26.
SLV has gotten close to $26, as of this writing. The trade has produced between 10% and 35%, in 15 days, based on your leverage and whether you have coupled your short with call options to decrease risk. That works out to a 896% profit on an annualized basis, for even the least risky variation. Therefore, the trade has worked extremely well, especially given the amount of risk taken. You can check out the original article for the details and variations of the trade I had suggested.
The trade has reached its target more quickly than my previous assumptions, however. While I had suggested my price target would be reached in 2.5 months, in actuality SLV went down to the $26 level much quicker due to the developments in the Eurozone. This article aims to update my trade suggestion based on the new developments.
I would argue that SLV has become oversold, along with many other assets, and investors should be disciplined with realizing their profits on this trade. There is no reason to get carried away with the possibility that SLV might crash even further.
There is certainly a good chance that SLV will take out $26 to the downside in the summer of 2012. The chances are, with many assets at extremely oversold levels, there is bound to be a short term bounce.
Based on the expectation of that short-term bounce I would suggest closing the SLV short and waiting for it to bounce back to at least the $28,7 level, and possibly $30, to initiate another short position. For investors that have originally bought calls to cover their initial short position, those call options will gain back their lost values as SLV bounces back. As the profit on the short SLV position is already realized, investors will get to profit from the upside of SLV through those call options, without any risk.
However, the above trade is for investors who insist on trading the SLV.
For investors open to trading other assets similar to SLV, I would suggest going long the Australian dollar (FXA). As of this writing, it has a better risk/return tradeoff than SLV. AUD moves almost on the exact same fundamentals as SLV does, so it is a very similar trade. I expect the AUD to appreciate to the 1,03 level which is approximately a 3.7% increase. The main determinant of profit in FX trades is adjusting the leverage, however, and acceptable leverage levels for FX trades like this are higher. I would suggest using approximately a 10X leverage. That would give about a 37% profit for the investors.
For investors who decide that my trading suggestions are of good quality I suggest using the "Follow" feature on SA. I have received some messages for more specific trading advice. I am hesitant to do that since I am not a RIA in the US. I write articles about most of the trading opportunities I come across anyway. So the "Follow" feature is much more efficient.
Disclosure: I am long FXA.