Written By: Teemoney
As a hedged play on Silver (and to compliment MK’s TA post), I’ve developed a trade focusing on iShares Silver Trust (SLV) and ProShares UltraShort Silver (ZSL), the 2X inverse. If we make bets for both ZSL and SLV in the same direction we can structure a virtually risk-free trade(excluding commisions).
The first leg of this trade is opening a SLV April vertical spread that is already in-the-money. Looking at the chart below we see that buying the april 33 call and selling the april 35 call leaves us a net debit of $106, almost 100% in-the-money to start. We also see that we have an almost 50-50 risk on the trade, meaning 1000 dollar investment will net either 2000 or 0. The maximum loss is incurred at 32.03 close to a 10% drop in SLV.
A 50-50 risk-reward isn’t the best ratio, so to truly make this trade worth our while we are going to open a similar spread on ZSL. If we enter the April 28call and sell the April 33 call we enter this trade for a net debit of 155. The beauty of this trade is that it if SLV drops, it pays 2400 for every 1000 invested.
We calculated that a 10% drop in SLV would lose us a 1000, however a 10% drop means a 20% gain in ZSL, which results in a 2400 gain.
Lastly, you can adjust the trade whether you are bullish or bearish on silver by adjusting the ratio of SLV to ZSL spreads.
I’ve entered added a table so you can see the different payouts depending on a bullish or bearish bias
The overall benefit of a trade like this is it’s non-directional setup. The primary advantage over say a straddle, or iron condor is that because we set our initial SLV spread in the money, the price of silver doesn’t have to move for us to make a profit. Also, if silver were to shoot up 20% in the next two weeks(very possible with commodities), you could close out the SLV leg of this trade for 100% gain and wait to see if SLV drops which would put your ZSL leg in for a gain as well, the possibilities are endless.
(Teemoney is neither long nor short silver or silver derivatives as of this writing. Positions may change at any time)
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