Will "Poor Man's Gold" Begin to Tarnish?
Today's Idea
The volatile personality of the Silver futures market has certainly been reflected in the relatively high premiums seen in Silver futures options market! The high volatility levels may cause some traders to choose to explore short option strategies in Silver futures options. An example of one such strategy would be selling out-of-the-money strangles. For example, with March Silver trading at 29.710 as of this writing, one could sell the February Silver 40 calls as well as the February Silver 23 puts for about 16.5 cents, or $825 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if March Silver is trading above 23.000 and below 40.000 at option expiration in late January. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of one such exit strategy would be to buy back the options before expiration should the option premiums rise to 3 times the premium received for selling the options originally.
Fundamentals
It has been a volatile couple of months for Silver traders, as prices raced to multi-decade highs, only to suffer from steep one or two day sell-offs before resuming their upward movement. Silver has been seen by some investors as a "poor man's Gold," which has drawn interest from speculators looking for a "cheaper" way to play Gold's rise to historic highs. This belief has caused Silver prices to post a much larger percentage gain than Gold this year, with the widely watched Gold/Silver ratio falling to just over 48:1, vs. 65:1 at the start of 2010. In addition, Silver is also viewed as an industrial metal, more so than Gold, and has gained the attention of traders looking for a way to speculate on "industrial" metals such as Copper and Aluminum. Physical stocks of Silver in COMEX approved warehouses has fallen to nearly 4-year lows at nearly 106 million ounces, as it appears that there is an increasing interest by some investors and traders to actually take delivery of the physical metal. This may become more prevalent should the CFTC impose stricter position limits for metal and energy futures.
Technical Notes
Looking at the daily chart for March Silver, we notice how closely prices have held above the 20-day moving average since the market really broke-out to the upside in late August. This key technical indicator will act as the first line of support and only a weekly close below this MA would send a potentially bearish signal to the market. The up-trend line drawn from the August 24th lows, which has held tightly to the 20-day MA for a majority of the rally, is the second line of defense for Silver bulls. If there is a major warning that the up-move may be overdue for a serious price correction, it is the rather impressive bearish divergence seen in the 14-day RSI that has failed to make a new high reading corresponding to the market making new highs since October! The next resistance point for March Silver is seen at the contract high of 30.750. Near-term support is found at the 20-day moving average near the 28.010 area.
Mike Zarembski, Senior Commodity Analyst
