Weekly Options Trade: The ‘Silver’ Lining in the Fiscal Cliff

While gold's been pulling back, silver is showing a bullish bias - use weekly options to capture the most from its move

   

The uncertainty created by the fiscal cliff is not all bad – if you’re one of three people left in the U.S. not watching football, the debates in Washington, D.C. are another series of games you can watch while making dinner. And how about the uncertainty in Italy now that the technocrat Prime Minister is leaving and real – and therefore unreal – Italian politicians will be back in power?

Political uncertainty is going to be with us for several years, until we get the real recovery I foresee in 2016-2017, and as the first believers among businesses and consumers, the U.S. will be energy independent a few years after that.

Trade it, generate income with it, make serious money with it.

In times of uncertainty, traders turn to Treasuries, even when, as it did in the summer of 2011, the U.S. says it might not pay back the money it borrowed through Treasuries. Treasuries are in a super bull market now, but it may be a bubble, so I recommend staying away.

What to trade, then? Silver. Buy silver calls and sell (short) silver puts. Do it each week with weekly options that expire every Friday to minimize your exposure and pocket weekly cash.

Why silver? It is still about one-third or so below its previous high. Gold has been stagnant, as have the gold miners. Silver has been steadily climbing – and it moves on economic news as well, such as increased demand for the metal in China. But there are so many names in the space – Hecla Mining (NYSE:HL), Silver Wheaton (NYSE:SLW), Endeavour Silver Corp. (NYSE:EXK), Pan American Silver Corp. (NASDAQ:PAAS) and Silver Standard Resources (NASDAQ:SSRI) to name a few – how should a trader play it?

The iShares Silver Trust ETF (NYSE:SLV) is going to and fro with an upward bias. Check out the bias for the week – or the day – and you should consider selling to open (shorting) a put or buy a call, or both. This week, I prefer selling a put to take advantage of this range-bound market.

If you are a real bull – and let’s say the SLV is trading for $32.30; that is where it is as I write this – you can sell to open (also called option writing) a weekly SLV 32 put that expires Friday, Dec. 15, for 24 cents, or $24 a contract. That is a 0.75% percent return in a week – or 37.5% on an annualized basis.

If you are bit nervous about being put the SLV shares at Friday’s expiration, you can go to the $31.50 put strike. Another reason I like the SLV is because there are 50-cent increments in the weekly options. If you go to the $31.50 put, with the SLV at that price, you cut your return in half – which means an annualized return still close to 19%.

And, if you are put SLV shares, just turn around and sell calls with rich, if not richer, premiums.

Not bad. Bring on Boehner, bring on Berlusconi – bring on that uncertainty!

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