How to Short Silver Without Getting Your Face Ripped Off

stevenplace
April 25th, 2011

I guess it’s now official.

In the course of 9 months, SLV has become a cool double. The silver market is seeing very, very strong moves in which the rate of change is increasing. When this happens, the chart looks like a parabola, or an exponential function.

Parabolic moves indicate that there is ever increasing demand. Odds are, in this particular case, we’re in a bit of a bubble.

Stepping in Front of Freight Trains

The problem here is: even if you recognize that the upside movement is getting a little stupid, it doesn’t necessarily make sense for you to blindly short it or get long an inverse etf just because you think it will drop soon. These kinds of runs can go on much longer than what you expect.

That’s where options come in.

Structuring Your Top Calling Trade

There’s a variety of ways you can try and time a top in SLV, but what’s important here is that you need to know what you’ll lose if you’re wrong– that’s why I’m not a big fan of naked call sales here or anything that has unlimited exposure. I’d rather be on the insurance-buying side of this market.

My weapon of choice here is known as a put backspread. This is where you sell a put and buy OTM puts on a ratio. This creates a limited risk, unlimited reward kind of trade, and there’s some volatility skew considerations that should help out the trade if it works. I’m looking at this one in particular:

Sell -1 Jun 43 Put

Buy 2 Jun 41 Put

Debit: .57

Why is this trade nice? Because if I completely mis-time the top, my max upside loss is limited to $57 per spread. My absolute max loss would be a pin of 41 at Jun options expiration, but I wouldn’t hold it all the way until then.

Here’s the risk:

Any sort of “healthy” correction would help this trade– a pullback to 42 quickly would give us a nice double on the trade, then you could modify the spread into something that locks in those profits and you can still play the downside with house money.

As I said, many ways to play this here. You could go with put calendars, straddle buys, or just put buys straight up.

Does this analysis help you? I’ve got plenty more where that comes from at IWO Premium. Check it out.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: slv