The iShares Silver Trust (ETF) (SLV) is fast approaching a critical juncture.
A bullish victory could spark a sharp rebound and deliver profits aplenty to tactical buyers. A bearish victory would result in a renewed descent in the ailing precious metal.
The critical juncture, of course, is the pivotal support level looming large just beneath the price of SLV. For the past 10 months silver prices have been locked in a trading range unable to break free.
To the bulls credit each and every attempt to breach the lower end of the range has been denied in short order.
The $14.75 zone has proven formidable support in the past and its about to be tested yet again. If you’re willing to bet buyers succeed once more this is an interesting spot for a bullish trade.
Buyers also have mean reversion at their back. The silver ETF has fallen virtually uninterrupted over the past six weeks bringing it deep into oversold territory.
Previous ventures this far south have precipitated a sharp rally in prices once mean reversion finally exerted its influence.
While the odds of a bounce are elevated, timing the snap back can be a bit tricky. To hedge against a delay we can structure a trade that profits even if SLV meanders sideways.
Sell the SLV Aug $14.50 puts for 32 cents. The short put play profits from the effects of time decay providing a steady profit stream even if silver prices stagnate for a spell before finally rising.
Consider the naked put a bet that SLV remains above $14.50 between now and August expiration. The maximum reward is limited to the initial 32-cent credit.
By selling the put you obligate yourself to buy 100 shares of SLV at $14.50 should the puts sit in the money at expiration. To limit the loss and sidestep assignment you could exit if SLV falls through the $14.75 support zone.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
