Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
If you listened to Money Morning's recent special report from global resources expert Peter Krauth, you know the long-term outlook for silver is decidedly positive.
Soaring investment demand, continued industrial use, a growing supply shortage, and falling ore quality all signal a sharply bullish outlook for the "poor man's precious metal."
So, how can you position yourself to profit from silver's coming advance without exposing yourself to the excessive risk?
One way is to use options – either on silver futures contracts or shares of silver-related stocks and exchange-traded funds (ETFs) – in a strategy that strictly defines and limits your risk while still offering short-term returns of 100% or more.
Silver Options: How to Create a Bull Call Spread
Known as a "bull call spread," this technique involves simultaneously buying and selling two call options with the same underlying security and expiration date, but with differing strike prices.
Typically, a bull call spread involves buying an at- or slightly in-the-money call option – one with a strike price very near the current price of the underlying asset – and simultaneously selling an out-of-the-money call option with a strike price several increments above the current security price.
The difference between the two strike prices is referred to as the "spread."
To illustrate, let's look at an example using options on silver futures, which are traded in the CME Group's Comex division. In this case, one futures options contract represents 5,000 ounces of silver.
To create your bull call spread, you would purchase the slightly in-the-money July $33.00 call, quoted at $3.451 an ounce ($17,255), and simultaneously sell the out-of-the-money July $35.00 call at a price of $2.572 an ounce ($12,860).
The net cost of this spread is 87.9 cents an ounce ($3.451 – $2.572 = $0.879), or $4,395. That is also your maximum possible loss on the trade should the July silver future stand below $33.00 when the options expire on June 26, 2012.
What's more, the spread trade breaks even at a July silver futures price of just $33.879 as opposed to the break-even price of $36.451 had you merely purchased the $33.00 call alone.
So, what's the catch?
Simply this: While the spread trade has a maximum possible loss ($4,395), it also has a maximum possible profit – in this case, $5,605.
That sum – the $2.00 difference between the $33.00 and $35.00 strike prices ($10,000), minus the cost of the spread ($0.879, or $4,395) – is the most you can make on this particular trade, regardless of how high the silver futures price might climb by late June.
However, you achieve that profit at any silver futures price above $35.00 an ounce – meaning you need a move of just $1.538 ($35.000 – $33.462 = $1.538) from the current price to make the maximum profit at expiration, easily attainable in this market environment.
Profitable Returns with Silver Options
That maximum profit represents a return of 127.5% on your initial investment – in just over four months.
Plus, if silver makes a large upmove prior to expiration, you can take your profits early and position a new bull call spread using higher strike prices and/or a more distant expiration month.
Table No. 1 shows the profit/loss scenario for this spread at various silver price levels, compared to the profit/loss on the purchase of the futures contract alone.
Be aware, though, that you can easily adjust the risk/reward characteristics of any bull call spread by selecting different option strike prices and widening or narrowing the range between them.
For example, in the above situation, you could have instead purchased the July $33.00 call at $3.451 and sold the July $36.00 call, priced at $2.217 an ounce. That would have given you a spread of $1.234, a maximum possible loss of $6,170 and a maximum possible profit of $8,830 – a potential return of 143.1%.
The choice is yours, based on your own risk/reward preferences.
The strategy is also fully adaptable to any other silver-related investment on which options are available.
For example, if you wanted to trade at a smaller level than the 5,000-ounce futures, you might look at the options on the iShares Silver Trust ETF (NYSEArca: SLV), recent price $32.54.
SLV's price fairly closely tracks actual silver movements, but each option represents just 100 shares.
As quoted early this week, that means one July SLV $32.00 call would cost just $355.
To create your bull call spread you could buy 10 of them and simultaneously sell 10 SLV July $36.00 calls, priced at $1.90 ($190).
Doing so, you would create a 1,000-share spread with a total cost and risk of just $1,550 vs. a maximum possible profit of $2,450, as shown in Table 2, giving you a potential return of 158.0%.
Either way, a bull call spread is a good way to maximize your gains on silver while limiting your risk.
News and Related Story Links:
- Money Money Map Press:
Special Report: Silver Exposed – The Biggest Short Squeeze in History - Money Morning:
How to Safely Double Your Dividend Yield With Covered Call Options - Money Morning:
An Options Strategy That Will Save You Some Money - Money Morning:
Cash-Secured Puts: Keep the Cash Flowing – Even After You've Sold the Stock - The Options Industry Council (OIC):
Options Strategies: Bull Call Spread
Yes! Debit spreads or "bull call spreads" are the best way to employ leverage without excessive risk.
Much greater returns with marginal additional risk and a lot less capital commitment…what's not to like? However, I'd venture a guess that most people won't even read this, much less try to figure out how to implement these trades, because they seem complicated. They aren't. Been doing them for years. Nothing better.
If I might respectfully make a couple of suggestions.
First…I prefer strikes that are deeper in the money for my long side of the spread. Builds in more margin of error, which calms the nerves, and the premia are lower.
Second…I wouldn't hold SLV even as a trading vehicle. JP Morgan is the custodian. Think fox guarding the chicken coop, as Morgan is the chief conspirator in the silver suppression scheme.
Considering that the "lost" money from MFGlobal somehow ended up at JPMorgan, it would behoove people to be wary. They can get away with ANYTHING. They ARE the puppetmaster of the Fed and the Fed acts with absolute impunity.
I would recommend using SLW instead. Same dynamics. No fraud.
Koodo, to fallingman, it seems that he knows his stuff, i would love to get in touch with him,
any chance to get me in contact with him?-Paul
P.S. You can give him my contact(e-mail adress)
Now even jump on the Silvertrain?
Imagine you want to travel for 10 years and during that time you had no way to take care of your investments. How would your money in the face of a volatile stock market, a troubled real estate market and general economic malaise to invest the time your return?
Silver and gold are investments that are attractive in the last 10 years of gains, while an asset protection offered, which was independent of all other asset classes. It has silver in addition to the monetary character of the charm of a basic commodity and there are still so few investors, the real "silver story" know, it is almost certain that silver will find over time more recognition.
The silver supply is subject to restrictions and limitations. The promotion and production of metal resources in general is more expensive from year to year. This is due to the rising mining costs and the fact that the levels decline. The largest and cheapest deposits have been found and mined.
Rising standard of living
, the world's population now has the status of 7 billion people reached. In the next 10 years will be added another 750 million new people and in the next 20 years, maybe even one billion on top of it. This represents six times the current population of the United States. Most likely, this development will go hand in hand with a rising standard of living worldwide.
Rising living standards are expressed among other things, to an increasing use of electronic devices in all its forms – from television sets, refrigerators and washing machines, computers to mobile phones. Silver is the best electrical conductor, and growing demand seems certain. Silver also has other properties: It has the best reflective properties, it has the highest thermal conductivity. These properties make the metal is indispensable in modern life.
600 million ounces of ETFs
as investment grew silver along with gold in the past 10 years better than any other investment. It was not until five years will delight in the world silver investments. During this period, were purchased by over 600 million ounces of silver Exchange Traded Fund (ETF), were also hundreds of millions of ounces of silver demand in the form of coins and bullion. For a global investment movement for five years, a very short period of time. To set a per capita calculation, it was only a tenth of global ounce (1/10 oz) sold per person. One can therefore correct to say that the global investment trend for silver is still in its infancy.
Today there is more capital investment than ever before. The capital base is more concentrated than ever before – distributed to banks, large investment pools and hedge funds. We are talking about many trillions of dollars. The total salable silver the world has a value of less than $ 35 billion – that's just half the market value of the larger German companies.
Fund & Co.
Despite the large investment movements of the last 5 and 10 years is the participation of the great wealth concentrated funds and asset managers still coming. However, it is only a matter of time, wake up to the big and really get involved in silver. When one thinks of the small available amounts of silver and the size of these funds, their participation is likely to have an explosive effect.
Ten years ago there was not a problem: the growing unease over government debt. State debt of the developed world are considered critical and suddenly shunned. That will not stop just like that again or easy to fix. And one can well imagine that the distrust of the paper will continue to grow. Distrust of the paper means distrust of the promises to pay another party. The only escape is to the effect of the change only to assets that are not promises of payment and the solvency of other dependent. Gold and silver are the best examples of such investments.
Growing mistrust
the growing distrust of European government debt at the same time led to more and more money into bonds and other government securities on insured bank accounts is created. Investors flood the banks with deposits that yield little or no interest. Money is piling up on the "sidelines" as never before.
In due time, this money seeking better returns than those currently paid on insured deposits virtually zero percent. Gold and silver will continue to tighten in the coming years, parts of that money. The two precious metals are currently still in strong consolidation phase. The year 2011 is coming to an end and we are very optimistic for 2012 for precious metals. For it is simply pure reason, which prompted investors to buy gold and silver.
https://sites.google.com/site/silberzug2011info/
hi ! so how do i trade with options from Australia ? is there some one that handles option trading ?
thanks
silvano
"fallingman" I am of the same sentiment as Paul. I am a newbie and would love to learn how to do the "bull call spreads". I ALSO am willing to have my e-mail forwarded to him if he is amenable to this. Thx