Summer 2015 has buried the iShares Silver Trust (SLV) to fresh multi-year lows. But recent calls for bottom-feeding appear premature based on the longer-term SLV chart, and bears may want to position for aggressively lower prices still to come using long-term equity anticipation securities, or “LEAPS.” In this case, we’re looking at a long put strategy.
Earlier this month, Barron’s published an article titled Time to Buy Commodities. Multiple analysts and investment pros at Wells Fargo Securities, Van Eck Global and Advisors Asset Management backed the idea of buying into a massive commodity bottom being played out.
Goldman Sachs thinks the call is premature and at least in SLV, it appears the price chart and Fibonacci do as well.
SLV Monthly Stock Chart
Back in early June, I wrote in support of a bullish outlook for SLV based on an emerging three-month-long uptrend building on the daily chart.
The article discussed an oversold, support-style hammer candlestick entry using the daily chart as our guide, which was anticipated to be a pivot low within SLV’s developing and very symmetrical uptrend.
It was a low-risk, high-reward entry, but at the end of the day SLV stock’s character changed and the larger monthly downtrend prevailed.
Let’s look back and review what might have gone wrong in SLV as shares broke the uptrend and went on to fresh lows. The largest factor, which was admittedly overlooked, was the lack of Fibonacci support on the monthly chart.
The three most widely used Fibonacci supports are 38%, 50% and 62%. All can be used as levels for buying pullbacks or deeper corrective moves like in SLV. And depending on whether there are multiple Fibonacci cycles in play, clusters of Fibonacci levels can help define meaningful support.
But when support is broken, it needs to be respected as appears to be the case in SLV. This is particularly true of the 62% level. Traders generally agree a stock is more likely to revisit its lows before staging a meaningful uptrend when this key level fails to hold.
And when this Fibonacci level has been penetrated on a long-term chart like the monthly, it should hold even greater influence. That said, SLV stock broke the key 62% level prior to its massive bull run which began in late 2008, so a long-term target of a $8.45 can be better appreciated.
SLV Long-Term Long Put Strategy
Given the long-term view and estimate for much lower prices still to come in SLV, a simple, out-of-the-money long put position is reasonable. Option premiums were cheaper back in 2014, but aren’t prohibitive from a volatility standpoint.
In reviewing the options board in SLV and looking to capitalize on a larger price move but one which could realistically take several months or longer to play out, I like the LEAPS January 2017 $12 put for 95 cents or better.
Should SLV’s bear market take more serious hold of the price chart this long-term, a move to our estimated $8.45 in the silver ETF by expiration would yield a profit of $2.60.
A challenge of the 2008 lows in SLV within the next 520 calendar days could provide quicker and even larger gains if time premium is factored in versus just intrinsic or real stock value.
To further protect against the SLV contract’s guaranteed, limited loss feature, I’d set a money stop loss of about $2 in the silver ETF or a price of about $16.50.
Given the Greek component risks involved, this type of stop exit for the SLV put should limit the loss to around 50% or 45 to 55 cents if it were triggered in the next couple of months.
While needing to use a stop might be disrespecting our Fibonacci-based estimate in SLV, it does help us stay on the side of an always fluid market whose rules aren’t set in stone — or silver, for that matter.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
