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Dr. Kris hails from the land o' lakes, beer, bratwurst, and Bucky Badger. She traded in her cheese hat for a propeller beanie and has never looked back. She has two degrees from MIT because one just wasn't enough. Her life goal was to figure out the universe and having done that (at least to her... More
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  • Trade Of The Day: Playing The Breakout In Silver 2 comments
    Feb 28, 2012 5:33 PM | about stocks: SLV
    Precious metals have been on the move and today both the gold and silver etfs broke key resistance levels. Faced with a choice between the two, I prefer silver in the short-term for three reasons: 1. it and its etfs are cheaper; 2. it moves higher relative to gold (and vice versa); 3. if global growth picks up, silver would benefit more directly since it has many more industrial uses than gold. Today the silver etf (SLV) broke $35 resistance and is looking to retest its previous high of $41. The no-brainer way to play this expected move is to just buy the etf for around $36. The smarter way to play it is to buy SLV calls (but only if you understand the mechanics of options trading!).

    The June 35 and 36 call strikes are seeing very heavy volume today and a three-four month contract is the minimum expiry date to select for this trade to be fully realized (e.g., the SLV has between now and mid-June to move $5 which it has easily done in the past). The June 36 call can be for around $2.70.

    The maximum profit on this trade will be realized when the SLV is trading at $41 or above on or before expiration. At that time the call would be worth at least $5 giving a profit of $5 - $2.70 or $2.30. The reward to risk ratio (aka return on investment or ROI) of this trade would be $2.30/$2.70 = 85%. Contrast that with the equivalent return had you just bought the stock: $5 (profit)/$36 (initial investment) = 14%.

    Which trade would you rather take?

    Caveat: It is possible that to lose all of your initial investment with options so please understand the risks before investing. Note, too, that although you can lose all of your initial investment with the option trade, you could lose a lot more should the stock plummet.

    Themes: Precious metals, options, breakouts Stocks: SLV
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  •  
    Instead of buying SLV or options.....why not buy USLV (3x SLV) or AGQ (2x SLV)? Benefits are NO EXPIRATION and a 42% USLV gain is a good compromise between 85% option gain and 14% SLV stock gain...this way time is on your side for USLV in the event of a misstep.
    28 Feb 2012, 07:41 PM Reply Like
  •  
    Carl,

    I prefer options because of exactly what happened today--the precious metals tanked on the fact that Big Ben made no hint there would be more QE in the future (at least he hasn't so far in his trial, er, testimony before Congress). (And on that note had I done my due diligence I would have anticipated this possiblity and waited before making this trade.)

    Putting the asides aside, the main reason I prefer options is because my dollar risk is limited. For example, had I bought 100 shares of the USLV yesterday at an average price of $60/share, the investment would have cost me $6000. Today, the USLV is down 20% trading at $50 That represents a one day loss of $1000. Ugh.

    On the other hand, had I made the options trade, I would have spent $270 (representing 100 shares). As of this writing, the June 36 call is down 33% trading at $1.80 (or $180 per contract). This corresponds to a positional loss of only $90.

    Now I ask you, who would be less miserable--the person holding the $1000 loss or the one with a $90 loss?

    Options are my preference for this type of trade over the levered etfs, but you do raise valid points that should be considered by every investor.

    Please note too that leveraged and inverse etfs don't always do a good job of tracking the underlying over a longer time span. They're not designed for that purpose.

    Thanks for sharing your thoughts!

    Dr. K
    29 Feb 2012, 01:51 PM Reply Like
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