Silver Options Strategy: How low is too low?

Posted: Sept. 2, 2022, 1:46 p.m.

I've written on this topic before as it is one of the most asked questions I receive primarily from my long-only long-term precious metals investors. On the surface, I see a mix of near-term bearish factors and identifiable turning points to initiate a new bull market. First, on the bear side, you have a new contract high in the U.S. Dollar, a breakout in Treasury yields, and better-than-expected data reaffirming the Federal Reserve's aggressive stance on policy rate hikes. For instance, Fed Funds futures are still pricing a 75 bps hike after the jobs report. Another headwind for base metals that reduced demand is the "temporary" Chinese lockdowns for 21 million people in Chengdu initiated earlier this week. 

Daily Gold Chart


What about the bull case? The lockdowns will lift, the inflation data will flatten, and the rate hike cycle will end. I expect geopolitical headlines to resurface in China, Russia, and the Middle East this fall. Reports surfaced yesterday that Taiwan's military had downed a Chinese drone. I have to believe that an escalation of tensions or a full-scale military operation will provide a substantial boost to Gold prices. Also, I think Russia will freeze out Europe this winter by cutting off gas, pushing Crude Oil and other energy markets substantially higher. California is proposing to ban gas-powered cars while simultaneously acknowledging that the power grid cannot provide the necessary energy to satisfy the basic needs of large appliances and the current electric vehicle fleet in the state already. Demand for Copper and aluminum should significantly boost to fulfill the requirements. We will keep an eye on the December 2023 Copper futures contracts as a possible long-term position. If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

Daily Silver Chart


Silver Options Strategy 

In the past, I have found that it is best to use a calculated risk strategy in deeply oversold markets that haven't quite solidified a technical bottom. 

An options bull call spread is a trading strategy aiming to capitalize on an increase in the price of a given market or asset during times of high volatility or for counter-trend trades. The option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap your max loss if the price of an asset drops. However, the strategy also limits the potential gains in case of a price increase. Bullish investors often use this when trading futures as a calculated risk debit spread. 


We use the December Silver futures contract in this bull call spread example. We are buying 1 December Silver $18.50 call at 75 cents as our long call. We then simultaneously sell 1 December Silver $19.00 call at 60 cents as our short call. This action creates our premium, which is 15. We then multiply that by $50 to account for Silver's multiplier to get $750, or our total premium paid (plus any commissions or clearing fees). Knowing our premium paid, we can calculate our potential max profit simply by taking the difference in our strike prices ($19.00 - $18.50), which in this case is 50 cents, then we multiply 50 by $50 because this is a futures contract. That gives us a total of $2,500 as our max gross profit, minus our $750 premium, leaving us with a max net profit of $1,750 (less any commissions or clearing fees). I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold but can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here:  5-Step Technical Analysis Guide to Gold.

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