Tomorrow, investors around the globe will tune in to Fed Chairman Ben Bernanke's annual Jackson Hole address. If there is indeed any hint at another much anticipated round of Quantitative Easing, investors should also begin to think about methods of trading it. It is my belief that silver is currently the best way to trade QE3 if it arises.
The proof is in the pudding. Since the start of QE1, silver has outperformed both gold and Treasuries by a landslide. The chart below shows the returns of the iShares Silver Trust (SLV) and the SPDR Gold Trust (GLD) from the start of QE1 to the end of QE2.
Both SLV and GLD rallied tremendously during this period, but SLV clearly outperformed, producing more than twice the return of GLD. In fact, QE2 actually created a sort of mini-bubble in silver, causing SLV's return to peak at 400% at one point.
Now that we've established that SLV is the way to go if the Fed does indeed unleash another round of Quantitative Easing, it's time to address another conundrum. What if there is no QE3? On the one hand, SLV will likely see a leg down if that does happen. On the other hand, one needs to be prepared in case there is QE3 because it's also likely that a large portion of any rally will occur fairly quickly.
What you can do to get rid of the guesswork is simultaneously buy a slightly out of the money call with a strike price about $1 above the current market price and sell a put with a strike price about $1 below. For example, if you were to buy the October $30.50 call and sell the October $28.00 put it would cost you about 9 cents a share or $9 for the contract. For $9 you are open to gains if SLV moves above $30.50 but you are protected from any losses in the meantime as long as it remains above $28. If you chose instead to buy the October $31 call or sell the October $28.50 put, you would actually make a small amount of money on the trade.