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Options Theory: The Silver Boomerang

November 27, 2020

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Stacked Silver Bricks

The appeal of all asset classes waxes and wanes throughout time. Such is true with stocks, bonds, real estate, precious metals, bitcoin, and any other security you want to throw into the ring. There’s a question that circles the minds of all intelligent investors, and it’s one I suggest you add to your pre-purchase checklist.

“What’s the alternative?”

A query of the inquisitive

When you purchase gold, you are doing so instead of all the alternatives. In other words, the opportunity cost of buying gold is that you are not buying stocks, bonds, real estate, and bitcoin instead. The cost of gold is missing out on the opportunity to deploy your capital elsewhere.

Thus, there is constant competition among all assets for capital. It’s a never-ending beauty contest where the winner varies depending on a multitude of factors. Instead of makeup and physique, savvy investors judge based on interest rate levels, sentiment, technical analysis, and fundamental prowess.

Consider the current status of gold and silver, for instance. They’ve been weighed, measured, and found wanting. Gold bugs argue it shouldn’t be this way. Interest rates are in the basement, money printing is through the roof, and the U.S. dollar is on the verge of breaching significant support.

Usually, such facts would generate a tailwind for precious metals. But with stocks topping off one of the best months in history and seemingly pointing to more gains ahead, investor appetite for the shiny stuff has fallen.

But if you’re a true believer in the long-term bullish thesis for gold and silver, then bargain prices should bring delight, not doubt.

Enter the Boomerang

With this morning’s 3% decline in SLV, the silver ETF has officially fallen 23% from its 2020 peak. That puts it in bear market territory and ushers in all sorts of bad juju associated with eclipsing the -20% threshold.

For those willing to play the long game and view this as a buying opportunity, however, the beautifully named boomerang strategy could be worth a look.

The system consists of systematically selling naked puts and covered calls. In timing the initial entry, it’s probably wise to wait for signs of a bottom – or at least a pivot low forming. At this stage in the selloff, we’ve reached a point where traders can now sell puts below the 200-day moving average for a respectable return.

The idea is doubly appealing if you’re willing to begin adding shares of SLV to your portfolio.

Let me end with a disclaimer. I have no idea how low silver will go. It could drop back to its 2020 low of $10.86 for all I know. Furthermore, selling puts right now is a counter-trend, and thus contrarian trade. You have to be comfortable with that and size accordingly if you’re going to entertain a boomerang.

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