This Silver Options Trade Could Net 275% (SLV)

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Silver prices continue to face downward pressure as a combination of declining global inflation expectations and a stronger U.S. dollar conspire to erode precious metals’ value.

And if you think that pressure is going to continue to weigh on silver prices as I do, this put option on the iShares Silver Trust (ETF) (SLV) will allow you to leverage your capital and generate a 275% return by July 2015.

Sinking Silver Prices

Recent events have highlighted the divergent path of the Japanese, European and U.S. central banks and could be a catalyst that further strengthens the U.S. dollar. Silver prices (like gold) are quoted in U.S. dollars, so typically, a stronger U.S. dollar generally equates to weaker silver.

Last week, two historic central bank events took place that could be the catalyst for a strong dollar, and falling silver prices:

On Wednesday, the Federal Open Market Committee announced that it would be terminating its bond purchase program, and would not purchase any additional treasury or agency securities. The Fed’s third quantitative easing program began in September 2012, and ended in October 2014. At its peak, the central bank was purchasing $85 billion of securities, and the lack of future purchases puts the Fed back on a path to interest-rate normalization.

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On Friday, the Bank of Japan announced that it would increase its quantitative easing program by adding an additional 10 trillion to 20 trillion yen. This would bring the asset purchase program to approximately 70 trillion yen. The BoJ announced that the expansion in QE will see the central bank increase purchases of Japanese government bonds and other assets, in an effort to avoid deflationary expectations.

Recent U.S. economic data had led to higher U.S. interest rates relative to Japanese and European interest rates, and increased the attractiveness of owning the U.S. dollar. Q3 GDP expanded at a 3.5% rate compared to the 3% expected by economists. The upside surprise was driven by a defense led government spending surge. Additionally, the October ISM rose to 59 compared to median expectations of 56.3. The employment index rose to 55.5 from 54.6 last month, and the production component grew to 64.8 from 64.6.

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The technical outlook for the iShares Silver Trust (SLV) is negative. Prices broke through trendline support near $16.25 and are likely to continue to move lower. Resistance on the SLV is seen near the 20-day moving average at $16.44, while target support is seen the 2007 lows at $11 per share.

Momentum has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. The MACD is a momentum indicator that tracks the difference between two moving averages (the 12-day and the 26-day) and compares that difference to the 9-day moving average of the difference. The sell signal occurs when the moving average difference crosses below the 9-day moving average of the difference, and the MACD index crosses from positive to negative territory.

How to Trade SLV

One way to experience significant returns if silver prices continue to fall is to purchase an out-of-the-money put on the SLV

If you believe that silver prices will continue to decline as the Federal Reserve contemplates an interest-rate rise in the middle of 2015, you could purchase an SLV July 2015 $12.50 put for 40 cents. A drop to that target support of $11 (a decline of some 30%) would net you 275% ($12.50 strike price – $11 – 40 cents options cost = $1.10).

As of this writing, David Becker did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/slv-silver-prices/.

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