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Options Theory: How I Played the Silver Swoon

October 1, 2020

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I said swoon, not spoon!

When making money gets overly easy, the market is notorious for throwing a curveball. I’ll allow you to be surprised the first few times, but after that – wise up and expect it.

The tech wreck last month is a perfect example. So is the nasty swoon in silver. It’s the latter one that I want to focus on today. I have a few silver positions and wanted to share how I managed them through the drama. Exercises like this help me examine my decision-making.

Implied volatility ballooned alongside precious metals over the summer, making strategies like covered calls and naked puts mighty attractive. Expanding premiums created bigger paydays for traders willing to step up and sell options.

So sell I did.

Covered Calls

I headed into the infamous plunge of Sep 21st long shares and short the Oct 30 call. I originally sold it for 60 cents (on Sep 2nd). With support clearly shattered, I opted to roll down my Oct 30 call to an Oct 26.50 call. I bought back the 30 strike for 9 cents while selling the 26.50 strike for 27 cents. The net credit was 18 cents.

The benefit of rolling down is you bring in more premium to offset further losses in the stock.

Fast forward nine days to Sep 30th. The SLV chart formed a potential bear retracement, and I thought more weakness could be in store. The Oct 26.50 call only had 9 cents remaining, so I decided to roll down and out to the Nov 26 call. After buying back the Oct call for 9 cents, I sold the Nov call for 54 cents, resulting in a net credit of 45 cents.

The benefit of rolling down and out is I extended the trade out to November and picked up additional premium. You’ll note that the new strike is still a fair distance OTM. That way, if silver finally recovers, I can participate in most of the rebound.

Naked Puts

I’ve also been playing naked puts alongside my stock position. On Aug 28th, I sold the Oct $22 put for 49 cents. At the time, SLV was trading for $25.50 so I was pretty far OTM. This is the strike I held into last month’s massacre.

My game plan was to scale-in to more contracts during weakness. On Sep 23rd, I sold another Oct $22 put for $1.00, or roughly double the original credit received. This effectively raised my average credit from 49 cents to 75 cents. That way, I would recoup losses quicker when SLV snapped back.

I ended up missing the pivot low by a day. Turns out I could have got more like $1.50 for the second Oct $22 put. But, whatever. I rarely nail the exact low.

With the current rebound, SLV is pushing back above $22 and the 22 puts have fallen back in value to 70 cents. I’m now faced with a choice.

One: Exit the short puts at a slight profit and thank the gods you escaped the massive drop without losing.

Two: Let the trade ride in hopes that SLV will sit above $22 at expiration and you’ll depart with max gain.

Three: Close the second short put to lock-in a gain of 30 cents ($1.00 – 70 cents), and let the first one ride. If we sell-off anew, you can reenter another short put at a better price.

Pick yer Poison

Which would you choose?

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One Reply to “Options Theory: How I Played the Silver Swoon”

  1. Avatar MichaelProkop says:

    I’d likely choose the third option if my game plan to begin with was to scale-in to more contracts during weakness. What is your choice?

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