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Option Tip – Thursday, October 27, 2011
The iShares Silver Trust ETF’s Calls



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This Option Tip could be your Silver Bullet to a Profitable Moment using SLV Calls!



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Go for the gold with this limited-risk silver options play and place a silver lining in your investment strategy.

Tuesday’s market movements were pretty typical of the “risk-off” trade. As investors were selling off equities, they were piling into bonds and other safer havens such as gold and even silver. However, a steadying factor came into play yesterday and the markets wallowed to a reasonable finish.

Precious metals are certainly providing plenty of opportunities for an option tip. Despite silver’s relative weakness compared to gold, the iShares Silver Trust ETF’s (NYSE: SLV) daily chart is shaping up for a potential bullish play.

ALV silver

Summary of iShares Silver Trust ETF’s

The investment seeks to reflect the price of silver owned by the trust less the trust's expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.

The objective of the Trust is for the value of the iShares to reflect, at any given time, the price of silver owned by the Trust at that time. The Trust is a passive investment vehicle. The trustee of the Trust is The Bank of New York Mellon, which is responsible for the day to day administration of the Trust and the custodian of the Trust is JP Morgan Chase Bank N. A., London branch. The Trust’s sponsor is BlackRock Asset Management International Inc.

Reasoning for the Option Tip

As you can see in the chart below, SLV has formed a clean ascending triangle pattern over the past six weeks. Such a formation shows both stabilization in silver prices, as well as a minor increase in demand.

Further increasing the bullish appeal to the chart is the fact that there is a lack of overhead supply – a vacuum or price void, if you will. This increases the ease with which SLV can vault higher without encountering any major bouts of selling.

SLV - graph - 102711



While SLV has risen 13% over the past week and may be in need of a short-term pullback or consolidation, the daily trend is now up and may continue higher to the declining 50-day moving average.

SLV closed Wednesday's trading session at $32.50. In the past year, the ETF has hit a 52-week low of $22.70 and 52-week high of $48.35. Silver Trust has been showing support around $29.84 and resistance in the $33.80 range.

The market capitalization of the company stands at $10.20B and it has 314.40M outstanding shares.

Option Tip

If you want to acquire bullish exposure to silver via the SLV, one good way would be to buy a December bull-call spread. That gets you positioned for a nice run between now and December options expiration. And by offsetting the purchase of a call by selling another one against it, you’re effectively reducing your risk while being positioned to profit from silver’s upside.

Your bullish SLV spread consists of “Buying to Open” a lower-strike call while “Selling to Open” a higher-strike call in the same expiration month (December). What looks good right now is buying the SLV Dec 32 Call (currently trading at $2.70) while simultaneously selling the SLV Dec 35 Call (currently trading at $1.45) against it, for a net debit around $1.25.

The risk is limited to the debit paid at trade inception and the max reward is limited to the distance between strike prices ($35 – $32 = $3) minus the debit paid. Entered at this price, the risk is limited to $125 and the max reward is $175.

Alternative Option Tip

If you prefer to go for longer time-plays here are further option tips.

1. For a hedged play on Silver Trust (SLV), look at the Jul '12 $33.00 covered call for a net debit in the $27.48 area. That is also the break-even price for this trade. This covered call has a duration of 269 days, provides 15.26% downside protection and an assigned return rate of 20.09% for an annualized return rate of 27.26% (for comparison purposes only).

2. A lower-cost hedged play for Silver Trust (SLV) would use a longer term call option in place of the covered call ETF purchase. To use this strategy look at going long the Silver Trust (SLV) Jan '13 $23.00 call and selling the Jul '12 $33.00 call for a total debit of $7.00. The trade has a lifespan of 269 days and would provide 7.49% downside protection and an assigned return rate of 42.86% for an annualized return rate of 58% (for comparison purposes only).


silver coin


“Too many people miss the silver lining because they're expecting gold.”

- Maurice Setter


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