Profit From Rising Silver

July 23, 2013 at 11:17

truthing

Gold intrigues investors. Silver attracts traders.

Silver may be living up to its reputation for being three times more volatile than gold. Bullish calls on the iShare Silver Trust are starting to trade actively in anticipation that a substantial rally will follow silver’s significant fall.

Silver is down 33% this year and in recent weeks, the exchange-traded fund which is the primary equity proxy for the commodity, broke below $20. Many investors viewed $20 as the dividing line between bullish and bearish peregrinations.

Now the iShares Silver Trust is up about 4% and once more edging toward $20. The move toward the metal’s Maginot Line has returned silver to the forefront of the options market. Calls that would increase in value if the iShares Silver Trust traded higher than $22.50 or $23 by October are trading actively, suggesting professional investors believe silver could rally more than 13% in the next three months.

Traders are buying calls with strike prices near the fund’s current price in anticipation of further advances. The reasons for the sudden interest are not entirely clear. Silver is an industrial metal, unlike gold, so silver prices should strengthen if the U.S. economy is indeed improving enough for the Federal Reserve to talk about tapering the massive bond-buying operation that has stabilized the economy since the credit crisis. Traders may have an eye on the next meetings of the Open Market Committee, the bank’s rate-setting committee, which are scheduled for July 30 and 31, and again Sept 17 and 18.

That said, commodities markets are often animated by nothing more than momentum. So the sudden interest in upside silver calls could be attributable to nothing more than a widening view that which has fallen will rise.

To participate in an advance, aggressive traders can consider buying the iShares Silver Trust August $20 call for 22 cents. The risk is muted. If silver does not advance above $20.22, you lose the money spent to buy the call. If silver trades at say $21, the call is worth $1.

An alternative approach is to get paid to speculate on silver. Aggressive traders can sell the iShares Silver Trust’s August $18 put for 39 cents, which more than pays for the August $20 call. While trading for free has its own attraction, be advised that sellers of the August $18 put are obligated to buy the ETF if it drops below $18, or to pay a pretty penny to close out the position.

The iShares Silver Trust’s 52-week low is $17.75, so buying around $18 is like buying at the bottom. The looming risk is that silver prices fall far below $18, but the interest in upside calls suggests that is unlikely as the bullish momentum spreads across the options market.