Precious metals markets surged following Ben Bernanke’s speech last week when he shocked some in the market with his concession that QE 3 was needed and here to stay for the foreseeable future. Investors are now focused on Uncle Ben again.
Silver like gold rallied fiercely to the upside last week. Silver has traded up and through $20.00 an ounce but has failed to settle over that level as of this post. Silver has suffered a gut-wrenching year, losing a third of its value. With the silver price recently dipping down to $18.18 an ounce at the end of June before recovering, the question going forward is if we will see a more of a corrective bounce or a retest of the recent June lows.
CHART CLUES
To determine on a technical basis, I prefer looking at some Fibonacci levels that I believe bear watching. A 38 percent retracement from the 13 week high/low sits all the way up at 20.71. A fifty percent retracement takes Silver back up to 21.49 Fibonacci’s in my view are some of the most watched technical indicators.
FED SPEAK
Now fundamentally, if Bernanke reiterates his push to leave QE3 intact, it is my belief the aforementioned levels should be watched. If market sentiment sees Bernanke as indicating that the Fed will soon taper, it is my belief that a retest of the June lows could be seen.
SPREAD STRATEGY
Given these scenarios I believe there may be an opportunity for a classic spread strategy. Currently, one could purchase both an out of the money September Silver call spread and an out of the money September Put spread.
The option trade is commonly referred to as a strangle. The purpose of the trade is to be positioned on both sides of the market in case there is an extreme move in the underlying futures price up or down in the next few weeks.
THE DETAILS
The trade consists of buying the September Silver 2175 call and selling the September 2250 call, while at the same time buying the September Silver 1775 put and selling the September 1700 put for a purchase price of 15 cents or in dollar value $750.00. The risk on the trade is the price paid for the spread plus all commissions and fees. If one side of the spread’s strikes for example finishes in the money, the maximum one could collect at option expiration would be $3,750.00, minus all commissions and fees.
Please feel free to contact me for other trade recommendations and to receive my free commodity reports via email.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
