Precious metals are reeling following yesterday’s rate hike. GLD, SLV, and a cohort of miners are down anywhere from 1% to 9%. It’s a day of celebration for bears and a day of mourning for bulls.

While the size of today’s move may come as a shock to you, the direction shouldn’t. Remember, gold and crew have been steeped in downtrends for months now making the path of least resistance decisively lower. As illustrated oh-so-expertly in last week’s commodities report, a strong dollar is gold’s kryptonite. And in case you missed it, Janet Yellen lit a fire under the buck yesterday, and it’s been galloping higher ever since.

So what of those of us with passive exposure to metals via ETFs like GLD and SLV? Are we destined to suffer under the ongoing reign of the mighty dollar?

Probably. But you needn’t take it lying down.

But you needn’t take it lying down, son. Play some defense for heaven’s sake. While protective puts are always a viable option, theta lovers typically traverse the covered call route. That is, sell calls against your shares. One contract for hundred shares owned. Or, if you’re clever (and comfortable with naked calls), sell more.

One of the most enlightening ways to measure the impact of adding short calls to a stock position is via Delta. Delta measures your position’s rate of change given a $1 increase in the underlying. If you have 100 shares of SLV, then your Delta is 100. On the bright side, that means you capture $100 profit for each $1 rise in SLV. But, as we’ve all been reminded of recently, it also means you lose $100 for each $1 fall in SLV.

If you want to reduce your loss then reduce your delta. My method of choice is selling calls. Lower delta, out-of-the-money calls afford less protection while higher delta, in-the-money calls provide more protection.

For example, with SLV at $15.18, we could sell the Jan 15 call for 60 cents against our long stock position. The short call has a delta of -0.58, and by adding it to your stock you would reduce the overall position delta from +100 to +42. For the next $1 drop in SLV, you would only lose $42 instead of $100.

Not bad, eh?

The trade-off with selling higher delta, in-the-money calls is you limit your ability to participate on the upside if the stock recovers. By selling the SLV 15 call, you’re now obligated to sell your shares at $15. Which is a bummer if the silver fund ramps to $16, $17, or beyond between now and Jan expiration.

What? You thought you got something for nothing? Nonsense! The price of protection is capping your upside. Take it or leave it.

Personally, I take it when my focus turns from profit maximization to loss minimization (like now). Rest assured uptrends will eventually take root in gold and silver. For now, don your short calls and hedge away.

One more thing: if you purchased SLV with the intent of holding long-term and are now finding it too painful, that’s a tell-tale sign you have too big of a position.

Financial freedom is a journey

The Tales of a Technician series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

# Sign up now for a 15-DAY FREE TRIAL #

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.