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Tales of a Technician: A Silver Lining to the Precious Metal Rout

January 11, 2021

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Friday’s whack in precious metals was substantial. Both gold and silver sliced below short-term support zones and upended their recent daily uptrends. Gold got hit harder, making me much more interested in playing silver.

I’m using the Sep 21st crash as a guide for what to expect moving forward. I think this unwind won’t be as bad, but I want a plan to deal with it if it is. Hope for the best, prepare for the worst, as they say.

Implied volatility didn’t get as much of a bump as you might expect following such an outsized price drop. But at the 32nd percentile, it’s still high enough to make naked put trades interesting.

In fact, this looks like as good a setup as any to deploy the old silver boomerang. To preface my comments, this is not a recommendation. Consider it an illustration or case study to help you better understand when and why naked puts can be a powerful strategy.

The Silver Boomerang

For the newcomers to #teamtackle, the boomerang strategy refers to rotating between selling naked puts and covered calls. Essentially, you sell one until assigned, and then you pivot to the other.

With SLV currently trading at $23.35, suppose I sell the Feb $21 put for 40 cents. In doing so, I’m obligated to buy 100 shares at a cost basis of $20.60 if SLV sits below $21 at expiration.

The $20.60 purchase price is a 12% discount to the current value. It creates a wide profit range with a high probability of gain (currently 80%). In pulling the trigger, you could wait for prices to push above the prior day’s high to signal the next upswing has begun.

Your reward is limited to the initial 40 cents ($40 per contract). It may not sound like much, but the margin requirement is minimal, given the stock’s low price tag. If like me, your cost is only around $230, then the return on initial investment is 17%. This is great by naked put standards.

Trade Management

We can split the trade management into two categories: ITM or OTM. At expiration, you’ll face either outcome. If the put remains OTM, it will expire worthless, and you’ll pocket the entire $40. If it moves ITM, you could allow assignment and buy shares at an effective purchase price of $20.60. That puts your entry right at the rising 200-day moving average, which isn’t a bad entry if you’re longer-term bullish.

Once assigned, you could then sell covered calls to keep the cash flowing.

I like combining the naked put idea with scaling in to increase our odds of success further.

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