New Trade Alert for (SLV)
iShares Silver Exchange Traded Fund July $13.00 Call @$2.25 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 47%
Max Loss Probability: 17%
A resource reversal has Gold leading the commodity upturn with 2016 performance pushing on positive 20%. BullsEyeOption banked 110% on a February play in GDX against a backdrop of major market uncertainty.
Silver has been slower in its rally pace up about half as much as Gold. The Gold/Silver ratio has climbed to an extreme where it now takes 80 ounces of Silver to buy one ounce of Gold.
This rise above the 50-60 recent ratio norm illustrates how undervalued Silver is in comparison to Gold.
Silver as viewed through the SLV exchange traded fund had slid from recent highs near $50 to $13 lows in December. Bullish divergence with no new highs in volatility strongly suggested a bottom was put in place.
The technical pattern targets $17 which stands 15% higher than the current SLV price.
Only close below the $13.00 recent low on the weekly basis would negate this bullish buying premise.
The Options Way: Unlimited Upside Potential with Limited Risk.
A SLV long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move. There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With SLV trading at $14.80, for example, an In The Money $13.00 strike option currently has $1.80 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the SLV July $13.00 Call at $2.25 or less.
This option strike gives you the right to buy the shares at $13.00 per share, five year plus lows, with absolutely limited risk. The 52 week low was at $13.04 December 17th therefore this option can let you buy below the bottom at a major discount.
The July option has over four months for BULLISH development. An 82 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $225 or less paid per option contract. The upside is unlimited.
The SLV option trade break-even is $15.25 at expiration ($13.00 strike plus $2.25 or less option premium). That is just 50 cents above the current SLV ETF price.
A push above $15 targets $17 another 15% higher. At that modest level the option investment would gain nearly 100% to $4.00.