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Wednesday, July 18th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Options for Silver Traders

By Brad Zigler

Some silver traders were left scratching their heads after reading our feature, “Playing The Silver Gosose.” While the probabilities of breakout moves in the white metal were laid out in the article, no plan for actually “playing” the game was advanced.

For those teased by the headline, we offer the following stratagem—a bull call spread on the iShares Silver Trust (NYSE Arca: SLV).

In the article, the odds calculated for further bull moves in the near term were higher than those of a decline. Given silver’s—and, consequently, SLV’s—penchant for big gyrations, we can’t totally discount downside volatility.

What we need is a percentage shot for the near term. Hence the spread.

A bull spread is constructed by buying an SLV call option and simultaneously selling short another call with a higher exercise, or strike, price. The risk of being short a call is covered—meaning there’s no likelihood of margin calls—by ownership of the call with the lower strike.

With SLV trading midway between $29 and $30 now, an April $32 call could be purchased for 78 cents. If you had a near-term price expectation of $36 by mid-April, you might be enticed by the prospect of risking $78 for a potential $322 payday. That’s a 4-to-1 reward-to-risk ratio, after all.

By selling a $34 April call—and collecting 41 cents in premium—alongside your call purchase, though, you’re bestowed the same reward-to-risk potential, with just half the dollar outlay.

How so?

Your net premium cost would be just 37 cents, or $37 a spread. If SLV ends up at $37 by the option’s April expiration, the $32 call—now $5 in the money—would be worth $500. The $34 call would be in the money, too, but only by $3, or $300. Taking the initial outlay into consideration, the position could then be closed out with a $163 gain—four times your net purchase premium.

While fewer dollars are obtained at your objective, fewer can be lost if that downside volatility card gets laid down. A decline in silver and SLV prices, matter how deep, n’t expose you to more than $37 in losses—your initial cost.

With the naked call, you’d lose your $78 premium if SLV was at $32 or less at expiration. You’d break even at $32.78. With the spread, you’d be flat at $31.68. At any price below that, your potential for loss is limited to the spread’s $37 upfront debit.

In a nutshell, the bull call spread is one way to “play the silver goose.” It’s not the only way. We’ll cover more of those in future columns.

The original article is published at

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