Trade Update, Jul 20th, 2012 3:20 pm:
I originally put this trade on in anticipation of a break of $25.50 in SLV, which was multiyear support. While SLV did make several attempts to break that level, support held each time, and this was a very poor job of trading the position on my part as I should have monetized my options with a few weeks left to expiry instead of being forced to watch my premium decay as SLV sat between 25.50 and 27 for the last 2 weeks. A better strategy would have been to sell the puts with a few weeks left to expiry, and buy August puts on a bounce to maintain the position. I am still bearish on precious metals, but taking my loss here and moving on.
SLV ($26.50) Sold the SLV Jul 27 puts at 0.50, for a loss of 0.75
-Sold 1 Jul 27 put at 0.50
Original Trade, June 4th, 2012:
Silver caught my eye on Friday even though gold was getting all the headlines. There has been much talk about the potential for a break lower in GLD (here is one example of a technician’s take, from Peter Brandt, whom I admire as a technician) if it broke the $148 level. With Friday’s move up, many traders (including Mr. Brandt for example) tore up that scenario. But silver did not rally out of the “doom zone” as Mr. Brandt termed it, and looks as vulnerable as ever to a multiyear breakdown.
Let’s look at the 5 year chart of silver (using SLV, the Silver ETF) to first get our general bearings:
SLV had a huge breakout above 20 in late 2010, and then peaked with a blowoff top in the spring of 2011, on huge volume. Since that top, it has made a series of lower highs and lower lows, and now sits about $2 above the 25.50 level that has not been breached since late 2010.
Zooming in to the price action over the last 30 days, we can better see that SLV was not able to rally much on Friday, even with U.S. dollar weakness, and especially GLD strength.
As I’ve said before, if something does not go up on bullish news, then it’s probably going down. SLV holding below its $28 near term resistance on such a bullish day for precious metals leads me to believe that SLV is going to target a breakdown of the $26 to $25.50 area quite soon, following its other commodity brethren lower.
No doubt, the price action of the dollar is important for this trade. The U.S. dollar (as measured by UUP) is trading at its highest levels since the beginning of 2011, and I am implicitly taking a view here that this U.S. dollar strength is going to hold. There are many traders who talk about the consequences of QE3 hurting the dollar. Yet, the dollar is trading at a higher level today than before QE2 or Operation Twist were implemented, so I’m not convinced that the relationship is so simple. Japan implemented multiple rounds of quantitative easing in the past decade, and the Japanese Yen is still near all-time highs vs. many currencies.
Here’s the trade:
TRADE: SLV ($27.30) Bought July 27 put for $1.25
- Bought 1 July 27 put for 1.25
Break-even on July Expiration:
Profits with stock below 25.75. Losses of up to 1.25 between 25.75 and 27.00. Max loss of 1.25 above 27.00 on expiry.
TRADE RATIONALE:
Since I want to play for the breakdown, I wanted a trade that made money below the 25.50-26.00 support area. My view is that if that support breaks, SLV is in for a quick move to the lows 20s. Given the technical setup, this breakdown should either occur or not occur within the next month, which is why I’ve chosen July expiry.