Fed Chairman Ben Bernanke’s pledge to use “unconventional measures” to meet future crises may not have been enough to keep stocks afloat Monday, but it could be just enough to help push precious metals and the U.S. dollar back down in the short term.
Silver looks particularly interesting because it is up against a long-term resistance level within a channel that is almost a year old. An option trade on the iShares Silver Trust ETF (NYSE: SLV) here looks good, but because of the tight channel and nearby support, an option selling strategy like a credit spread would be ideal.
Trade: SLV September 18/19 call spread.
Target Entry Price:
Right now the spread is paying about 57 cents or so. I think an aggressive limit order at 59 cents has a good chance of being filled.
Exit Forecast:
If the assurances the Fed Chairman made on Friday about the U.S. economy are taken seriously by traders over the next two weeks, this trade should play out nicely. However, we would not expect SLV drop below $17 a share. Therefore, we would exit if the underlying met that price in the near term.
Position Sizing:
With a short call spread is easier to calculate the maximum loss than an outright naked position. In this case, you could consider the spread between the two strike prices ($1) minus the premium earned (57 cents) as the maximum loss (43 cents) and amount “invested.” This should help you size your position so that if things don’t work out with the trade it won’t be too disruptive.
To learn more about executing this trade, watch the video here.
Note: It is important to understand the risks of trading options before you attempt a trade like this. This article is for educational purposes only.
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