With equities continuing to reach for the stars, demand for silver and gold has ebbed in recent days.
Regardless of the action in stocks, precious metal lovers shouldn’t be surprised. After all the exchange-traded fund iShares Silver Trust (ETF) (NYSEARCA:SLV) was in desperate need of some profit taking to usher prices back to better levels for spectators to jump aboard.
Today we put SLV under a microscope to discover a trade or two.
Since notching a new two-year high earlier this month, shares of the silver ETF have quietly receded back to the rising 20-day moving average.
While it could retrace further, multiple support levels loom beneath it. The $17 level in particular should act as a bastion of strength going forward. It kept a lid on prices for months on end, and if the time-tested adage of old resistance becoming new support holds true, look for buyers to come out of the woodwork.
The 50-day moving average is also nestled close to $17, providing further significance to that level. But perhaps we’re getting ahead of ourselves. After all, the last upswing in SLV was accompanied by some insane momentum, not to mention heavy, heavy volume. As such, the current pullback may remain shallow if anxious buyers rush in.
Here’s the beauty of using SLV option contracts to structure our trade — we can build a position that profits as long as SLV remains above $17. Whether they rebound here or continue dropping for a few days yet matters little.
The SLV Options Trade
Guess which of all the liquid ETFs has the highest implied volatility right now? SLV. And that means you’re getting paid to sell options right here.
Couple that with its cheap price tag and the desire to structure a trade that profits provided the fund remains above $17 and you have a perfect storm for put selling.
Sell the Sep $17.50 puts for 31 cents. The max reward is limited to the initial 31 cents and will be captured if SLV sits above $17.50 at expiration. The expiration break-even is $17.19 give you a wide profit range.
By selling the put, you obligate yourself to buy 100 shares of the Silver ETF for each contract sold.
At the time of this writing Tyler Craig owned short puts on SLV.
