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Hedging Silver Position - Options Strategy

Apr. 27, 2011 11:51 AM ETSLV
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Seeking Alpha Analyst Since 2011

Options_pro has been an individual investor for more than 15 years. He has completed a MS in Computer Engineering, and an MBA in Finance. Greater Philadelphia area.
A recent silver rally has generated a lot of discussions of what the participant in the metal advance should currently do. The common advice is selling part of the position to lock in existing gains. As an alternative to the outright selling, the following calendar put spread on SLV ETF with a 35 strike can be implemented. 
This relatively inexpensive hedging strategy also allows capitalizing on the elevated options volatility levels for this ETF.
The position is initiated by writing May 35 puts and simultaneously buying July 35 puts.  Currently this position can be established for a debit of 55 cents. Once the May options expire (worthless if SLV closes above $35 on May 20), the remaining puts provide a portfolio protection through the July expiration.  Any potential correction in the metal will generate additional profits.  In the absence of any significant technical pullbacks during the time frame, an additional income can be generated by selling June 35 puts, effectively establishing another calendar spread.

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