It has been a busy week in the market, and there is a lot of uncertainty because of escalating trade tensions. Investors have been looking for safety in bonds and precious metals. Just like the last big push into metals, the price of silver isn’t keeping pace with the price of gold, which is why I’m recommending a bullish trade on iShares Silver Trust (NYSEARCA:SLV).
I recommended a trade on Newmont Goldcorp Corporation (NYSE:NEM) last time this was happening, but this time I think a bullish play on SLV makes more sense because we can take advantage of silver’s bullishness without worrying about any pullbacks in gold.
The Gold/Silver Ratio
Gold pushed above $1,450 per ounce, which is the highest it has been since 2013. Silver, while still above $16 per ounce, isn’t keeping pace. The gold/silver ratio is inching higher again, and we may see silver start to catch up.
Daily Chart of Gold/Silver Ratio — Chart Source: TradingView
In the chart above, the line rises when gold outpaces silver and falls when silver is advancing faster than gold. You can see that silver was catching up to gold quite a bit throughout July, while gold has started to outperform again over the past week or so.
A Big Gap Higher
Looking at a daily chart for SLV, we can see it jumped much higher on Tuesday of this week, but it fell yesterday. I’m expecting the stock to push higher over time, and this gap higher could mean SLV is establishing a new trading range.
Daily Chart of iShares Silver Trust (SLV) — Chart Source: TradingView
We’ve been waiting for a resolution to this trade conflict for a long time. Whenever the U.S. and China seem to be making progress, it all falls apart. Then the market reacts. With new tariffs coming from the U.S. and the currency manipulation of the Chinese government, I don’t see a resolution in the short term.
That means more volatility and more investors pushing into precious metals. While gold might be their first choice for now, historically, silver outperforms. That’s why a bullish debit spread on SLV is a cheap, effective way to trade this situation.
Using a spread order, buy to open the SLV Sept. 20th $16 call and sell to open the SLV Sept. 20th $17 call for a net debit of about $0.30.
Note: Be sure you are opening the monthly SLV options that expire on Friday, Sept. 20, 2019.
About Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.