Trade of the Day: Silver Play

I wonder if there’s a bubble in the silver market? Prices rallied again today and are now up 75 percent in the three months. 25 percent per month? The weak dollar is helping. Also, since gold trades at 1,500 an ounce, it’s a lot easier for investors to buy silver at less than $50. The interest in the SLV and other exchange-traded products is also giving silver a boost. The more shares rally, the more money that flows into the fund, and the more silver that the ETF is forced to buy. It becomes a self-feeding process.

In this environment, I would be hesitant to lean too far on either side of the trade. One idea is a put ratio back spread. For example, you sell two July 46 puts at $4.05 for a net credit of $8.10. Then, you buy three July 42 puts for $2.25 each for $6.75. The net credit is $1.35. If shares hold above $46, you do nothing and let the puts expire worthless. You keep the credit. On the other hand, you can also make money if the SLV makes a volatile move lower. The downside breakeven is at $35.30 at the expiration. But, we would not hold until the expiration, for the biggest risk is if shares settle at $42. At that point, the July 42 puts expire worthless and the 46 puts are $3 in-the-money. We’d exit if shares fall through late-May, early-June. (SLV July 42 – 46 (3X2) put ratio backspread at $1.35 or better).

Category: TradeOday