Silver, as represented by the SLV ETF, has had a pretty bumpy ride recently. If you’ve been in the market for a little while, you know that silver hit a high of $50 dropped down, dropped down some more to $25, rose back up to the low $30s, hit the mid-$30s and has now dropped down again. I have been long on silver for little while now, selling covered calls to generate income and lower my basis on the position. But the chart formations have turned downward.
So I had a few choices. I could just sell out of my stock. I could try selling covered calls on the way down with the hopes of buying them back. But what I chose to do instead was to buy puts.
A put contract goes up in value as a stock goes down in value. So as the price of silver goes down my put value increases, which more or less offsets any decline in the stock price. It’s not an exact one-for-one because the options that I chose was out of the money and had a delta of around .5. This means that for every one dollar drop in silver the put increased by $.50. As silver continues to drop, the delta of my puts goes up though. These are technical details that can be addressed in a separate post.
The end result is that I have maintained my position, and offset my potential losses. So when silver turns around, which it will at some point, my potential for profit will be immediate. I don’t have to wait for silver to go back up into the low $30s before I can make more money. I’ll make money immediately after the turn around.
So the question is when will silver go and turn around?
That is a much harder question to answer. We know that the most recent support for silver was around $25. I would expect there to be at least some hesitation when silver hits that point. Whether it will rebound from $25 or not depends on what’s going on. The financial markets are in a state of high anxiety right now. Nobody knows what is going to happen with the fiscal cliff and the U.S. Congress.
Now from a rational perspective, we know that the fiscal cliff doesn’t really matter. It’s a drop in the bucket compared to everything else that’s going on between the monetization of the debt, foreign-exchange rates, and the devaluation of fiat currencies around the world. But that doesn’t stop the market from reacting violently to this minor fluctuation.
These kinds of waves in the market create buying and selling opportunities. As silver declines, it will be a great entry point if you don’t have some already. We know that over the long term the stock of silver in the world has been depleted and the amount of dollars (and euros and yen and yuan) being created are increasing. So there is nowhere for the price of silver, and gold, to go but up. Along the way, there will be waves going up and down, but like I said, those are simply buying and selling opportunities.
That’s why I did not want to sell my SLV. I want to make sure that I keep my position for when the trend resumes upward. And then I can continue selling covered calls to create income from my silver and turn silver into cash flow.