Spot and Trade Institutional Money Moves

Algorithmic Trading with Human Interaction for:

Day Traders, Swing Traders, Long-Term Investors

Sunday, July 24, 2011

Trading Silver: NeverLossTrading Style

A trader who wanted to make $5,000 quick on trading silver came to ask how to best do so and this is the way we would do it:

Silver is the wildest horse to trade and those who trade it have to bring a high risk tolerance. The margin requirement to enter the contract is currently around $12,000 and it was shortly even raised to $30,000 per contract. Silver is a big contract: 5000-Torry –Ounces x $40/oz. = $200,000 that one contract controls. Currently, the average daily move of Silver is 1.5 points, which relates to $7,500 move per contract. This sure underlines the point that $5,000 can be made quick, but also lost quick (one tick = 0.005 = $25). The silver market is totally overtraded: The amount of Silver Futures traded every day, is at about 900 times more than physical silver could be supplied. This in leads to spiky short term rallies in both directions: up and down, making silver a high risk contract, which I would recommend for the new trader to stay away from.

On the chart, it looks like Silver sets up for a potential breakout to the upside, but is not there yet. If I am bullish in silver, I would trade SLV (the iShares ETF for Silver) and buy the September 39/40 Call-Spread, for a debit around 44 Cents, which provides the possibility to make $0.56 per share controlled and has 50% likelihood to come in the money, while the downside is totally protected: If Silver again falls off the skies, the maximum that can be lost is $0.44 per share controlled. When silver moves above $40, this Call Spread comes in the money and makes $560 for every $440 invested per contract. This is a potential return of 127% on risk capital with a low capital requirement.

Why would we not buy a $39 call option?

The premium for the call option is $2.49 and totally overrated by the current volatility. The price of one SLV share had to move $2.40 for us to make money at expiration and the likelihood for making the same $560 per contract as in the prior example is 30%. So we would risk $2400 to potentially make $560 on a 30% probability, which make buying a single call option an unacceptable trade.

One of the trades educated by