Thursday, July 26, 2012

Hi Ho Silverrrrrr!

Hi Ho Silverrrrrr!

Was that Mario Draghi or the Lone Ranger coming to the rescue this morning? So when all else fails print, spend, and do it again. Despite diminishing returns from central bank interventions, it looks like that’s what we will get. At some point the inflationary aspects of all this will rear its ugly head again and looking at the charts we may be nearing that inflection point. With many of my compadre’s looking at Gold, I'm inclined to look at the little guy Silver or at least SLV. On the chart you can see the downtrend line that has been intact since Feb - Mar. You also can see that it cracked yesterday after putting in a higher low earlier this month.

SLV has also not had more than 2 consecutive months with higher highs since April of 2011.

With that in mind an October spread would give us the time for this trade to work out. The play here is to buy 2 SLV Oct 27 calls and sell 1 Oct 26 call. Total debit should be around $1. Let’s say that prices for the spread are 26 Call 2.00 and 27 calls 1.50.  Maximum risk at expiration would be at the long strike of 27 where the 27 calls would be worthless, a S300 loss (1.50 x 2) and the 26 call would be worth $1, a $100 profit (Short 1 call at 2.00). So maximum risk is $200 per spread. Break even is 29.00 and the spread is profitable at the rate of $100 per point over 29 per spread. As usual risk is best contained by using 1% of equity for this trade.

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