Best trade if you believe Silver going to 50?

Symtrader,

It sounds like it's a lottery ticket that you are looking for. While it's true that you can buy Far OTM calls for pennies, you state that you want to put 20K at risk. Really? Have you ever dropped that kind of money on a bunch mega-millions tickets? You do understand that if expiration rolls around and SLV has not doubled, if it has not reached your break even, then your options expire worthless. Whether they are .03 per contract or $3.00 per contract, worthless is zero.

I like the idea of putting on a position like this, but unless you can easily laugh off a 20K loss, then reconsider the dollar amount you're putting at risk.

You mentioned having limited experience with options, so I thought you wouldn't mind my speaking up.

Go ahead, put on some lottery tickets ($50 strike SLV contracts). But watch your size. And meanwhile, play something more likely to succeed; could you make money if SLV went to $32 by April???

SilverDollarNYC




Quote from SymTrader:

What’s the best options trade if you believe silver is going to $50 and gold to 2000+ before the end of this year? Assuming you are willing to risk say 20K and want the most bang for your buck, what ‘s the best strategy?
From a guy who has only ever held outright put or call positions.
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Quote from SilverDollarNYC:

Symtrader,

It sounds like it's a lottery ticket that you are looking for. While it's true that you can buy Far OTM calls for pennies, you state that you want to put 20K at risk. Really? Have you ever dropped that kind of money on a bunch mega-millions tickets? You do understand that if expiration rolls around and SLV has not doubled, if it has not reached your break even, then your options expire worthless. Whether they are .03 per contract or $3.00 per contract, worthless is zero.

I like the idea of putting on a position like this, but unless you can easily laugh off a 20K loss, then reconsider the dollar amount you're putting at risk.

You mentioned having limited experience with options, so I thought you wouldn't mind my speaking up.

Go ahead, put on some lottery tickets ($50 strike SLV contracts). But watch your size. And meanwhile, play something more likely to succeed; could you make money if SLV went to $32 by April???

SilverDollarNYC
More...

I just have to assume that Symtrader is a multimillionaire who can throw away $20K without feeling it. An option bet that silver will hit $50 in a year is indeed like buying a bucket of lottery tickets.

I am not strongly bullish on silver for the upcoming year simply because it's already had such a good run up. (I hold the physical metal, which doesn't expire in a year.) Were I a bit more bullish I might buy a SLV Jan '12 vertical call spread at 26/35 for about $255 per spread. The maximum value at expiration would be $900, a mere 250% gain. That would meet my modest aspirations, and I wouldn't buy too many of those spreads either. At least I'd come out positive so long as SLV ends at 28.60 or better, which seems plausible.
 
Silver at 50 is very bullish, so I would just buy straight calls, I like the Jan 32 calls on the SLV as a first choice
 
Quote from uptik2000:

Funny you say that. Two weeks ago I was playing in a local poker tournament; three people at my table were talking all night about their silver and gold bull plays.
That's not to say the top is in however. The same conversations were going on in 1999 regarding tech stocks and it took a good while for the top to set in.
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Well, who knows whats gonna happen? But walk down the street and ask most every day folks how much they own in gold and silver assets beyond a wedding ring or a little bit of dinnerware, and theyre likely to say 'zilch'. Some guy did a YouTube video where he offered a bullion gold coin to people on the street for $50 (when it was worth over $1000 at the time) and they had no idea what it was. Americans aren't much of a factor in precious metals at this point in time. Will silver hit $50 and gold $2000 this year ? Maybe.
 
Thanks for all the feedback.

My bet on silver going to 50 is really predicated on my bullish view on gold. I have held positions in gold since 07, first only GLD and now only two junior gold miners. The smaller of the gold miner positions, which I put on about 8 months ago has done well, giving me an unrealized profit of about 20K around the time of my first post. (Now the profit is closer to 15K.) It is this profit which I intend to bet on the silver option trade.

I think my bet is not as reckless at it seems. Firstly I reduce my risk/exposure by getting my capital back on the stock I sell and then use only the profits to buy my “lottery tickets”. It would be virtually impossible to increase my profit 10 fold by hanging on to the junior miner even if gold goes ballistic, but it MIGHT be possible via the silver option bet.

I am committed to the idea that gold goes higher, and takes silver with it. Why silver $50? Because I have always believed that markets go back to test spikes, no matter how anomalously those spikes were formed. It has taken 30 years, so it could easily take longer. But it seems to me that now is as good a time as any.

Again I go back to gold for why now is probably the best chance for silver to retest, and maybe even go to new historic highs. Gold has every chance of making new highs this year. The arguments for gold going higher are well publicized, but my favorites are: dollar debasement, central banks going from net sellers to net buyers, and the explosion in personal wealth in India and China, where the passion for owning gold is etched in their cultures. It has been said that bubbles require a new paradigm if they are to form. Could the emergence of the new Indian and Chinese middle class be that new paradigm? Maybe we don’t have to wait for the global currency system to collapse.

Doing the silver options trade would probably feel the worst if gold/silver consolidate this year because then I would have been better off hanging on to the miner which would likely appreciate while my options expire worthless. If gold/silver collapse, then I am screwed no matter what I do.
 
Sym,

I too am bullish on precious metals so support your basic thesis. I also understand now that your view the profit you've got on your miner's trade as "the house's money" and therefore disposable.

I continue to question the strategy that you're considering, and since you mentioned that you've got only limited options trading experience, I want to emphasize the risk involved in playing at the 50 strike level.

In a nutshell, you could be oh-so-right on your thesis and still loose the entire position. Let's say you buy that 49 strike call and SLV goes right to $49 at expiration. Your contracts expire worthless. SLV at $50 you make tons, at $49, you loose it all.

So it becomes a question of choosing your strike, your degree of leverage, and the probability of breaking even. Choosing a lower strike reduces leverage but increases probability of a profitable trade.

SD
 
I have to admit that I never anticipated the current rocket ride in the silver price. At present it looks like $50 silver calls could be ITM within a few weeks.

It's because I'm no good at anticipating movements like this that I never get those 10 baggers that OTM options can produce.
 
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