Wednesday, February 22, 2012

Profitable Silver Option Trading Strategy

Silver is a blue chip investment. Conservative long term investors looking to store wealth often turn to silver and gold. We are going to review one of Reed Canter's option trading strategy to make excellent returns through silver as a core holding in your portfolio. Did you know that you can make a 25% dividend from silver options by holding it as a core of your portfolio? For background information and definitions, please read our article on Gold trading.

We will be looking at iShares Silver Trust (ETF) SLV which is currently trading at $33.17/share. iShares Silver Trust Holdings has about 9.6 metric tons or 308.4 million troy ounces of silver.

Click to Enlarge
As you can see in the above weekly graph, silver has been trading in a sideways fashion. The upper trading limit is around $34/share and the lower range looks about $30.67/share. If the stock moves above $34 with any significant volume, we expect the stock to move into a new trading range.

The strategy to make money in a sideways market with options is known as a covered call. Our silver strategy will be:
  1. Purchase shares of SLV at the current market price
  2. Sell the call option for those shares with one week expiration @ $34
  3. Place a buy stop order slightly above the call option execution price at $34.01 to $34.03
By selling the call option at about the breakout point $34 we collect a premium or dividend while retaining our shares. If SLV reaches the call option execution price by the end of the week, we will be obliged to sell our shares at a profit. Because we want to hold SLV in the new trading range, we place a buy stop order at $34. By placing a buy stop order at $34 we maintain our position in SLV as it moves into the new, higher trading range.

Due to the sideways movement of SLV over the last several weeks, multiple call options have sold. This sideways movement is referred to a handle. While the handle continues, we project an excellent annualized rate of return. Current Call options are selling at $.24 for the February 24 expiration strike price $34. Selling call options on SLV over the last 5 weeks averaged a premium of $.18 per week. Collecting $.18 per week for 52 week equates to a 28% annual return or dividend for holding SLV. Why hold silver hoping to make money only when it goes up when income can be made while it moves sideways?

We believe silver and gold are going to "break out" into a new higher trading range. The current buy order is $34.01 with limit of $34.03. This represents our buy stop recommendation which keeps us holding SLV after it "breaks out."  After SLV enters the new trading range, we continue this strategy with higher call option and buy stop prices.

For more tips on how to make money with conservative silver, gold and other blue chip core holding investments join our facebook group: Option Trading Strategies.


W.C. Varones said...

I didn't know you were an options trader.

I had to go to Options Rehab a few years ago... I still chase the dragon every now and then.

customs advisor said...

I am unaware of Silver's higher call option and buy stop prices and without this info we are trading on it..Thanks for sharing this info




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