Ride The Silver Bull With SIVR In The Money Call Options

| About: ETFS Physical (SIVR)
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Silver has been making a silent comeback in recent sessions and if QE2 was any preview of what things could look like for silver under QE^N, [[SIVR]] call options could prove to be a highly rewarding insurance policy for those hoarders of below mattress cash, bond investors, savers living on a fixed or low income, people on disability, etc...

You see, despite all of the talk of metals and commodities being expensive, the bottom line is that central banks are flooding the global economy with liquidity and governments absolutely suck at managing a checkbook. Some of the more outspoken Ludwig Von Mizes Tea Party types say that the government is debasing the U.S. Dollar in order to pay the bills. No matter what your political bend, it's clear that real assets like silver and gold are in bull markets and that stocks and now bonds are in flat to bear markets over the longer term.

So how do you play the trend of stagflation and rising commodity prices now that the trend may be getting long in the tooth from a mean reversion or historical perspective? Surely, value investors (like myself) cringe at the thought of "speculating" on something like cattle futures, but the bottom line is that the rise in price of Unleaded Gas has creamed just about every index fund, portfolio manager, hedge fund, etc...

The question of whether or not it is too late to allocate money into hard assets is becoming more of a rhetorical one -- as the value of paper money declines, the real question is how much will the purchasing power of our FIAT backed currency decline over time and what is the best way to insure one's cash or cash flow from the risk of extreme currency devaluation.

For me, the best option is just that, an option. If keeping your options open and not "marrying" trades makes sense to you as it does to me, the best way to play silver looks to be purchasing a slightly "in the money" call option on the ETFS Physical Silver Fund, which would represent a notional amount of silver used to hedge your cash or bond holdings. So, for instance, if you had $100,000 in cash and you wanted to hedge your currency risk a bit by putting $20,000 in silver you could instead invest around $3000 or so into the SIVR in the money call options and gain almost the same upside while risking much less of your principal if the "paper silver" monsters decide to crash the currency debasement party. SLV call options aren't for me because I think SIVR is a bit more believable from a stewardship point of view. The problem is, that most hard core conspiracy hard money Hill Billy types are actually being proven right with their "crazy" gold investing. It may actually be time to listen to them after all, and they say that the J.P. Morgan "paper silver" fund (NYSEARCA:SLV) is some type of "paper" or illusory ETF with no actual silver or at least not enough physical metal to make the fund whole. SIVR may not be much better according to the shotgun yielding conspiracy set (and yes I guess I fit into this somehow even though I'm a liberal business hippy), but at least the ETFS silver fund gives some nod to the "physical" market which helps me sleep at night - ETFS is certainly not the largest commercial short seller in the silver market like Morgan is rumored to be - though I just heard that around the timeless water cooler chat that is finance-based social media.

Personally, I am long the December 2012 SIVR $32 call option which is trading around $1.90 or so per contract as I write. The "trade" is pretty interesting because these options are carrying almost zero premium to the price of SIVR shares. In other words, you don't pay very much at all in interest or transaction costs for the leverage you receive from purchasing call options.

You also sleep better at night in this trade because you have an automatic stop loss order in place at $30 in case silver is "crushed" by "POMO" or whatever else may cause the metal to lose its luster. Consider this intelligent speculating if you want to, however, I think this strategy is more of an intelligent hedge against currency risk. Heck, think of it like casualty insurance against governmental ineptitude if you don't like the idea of "buying high." With paper money being created out of thin air, the bottom may be a lot lower than anyone thinks. I certainly hope that we get our house in order and that silver and gold fall dramatically. The facts simply don't make the "all clear" scenario very believable in my humble view.

Disclosure: I am long SIVR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.