The following is an option strategy brought forth by
IVolatility.com. I actually use their site to look at IV charts for options. The strategy they are suggesting is a
Bullish Call Ratio Backspread and a Short Put on SLW, a silver mining company.
The Silver Story
In Volatility Trading Digest™ Volume 9, Issue 32, The Season for Gold, dated August 17, 2009 and then again, in IVolatility Trading Digest™ Volume 9, Issue 33, Seasonal Gold 2.0, dated August 24, 2009 we suggested new positions in the precious metals sector using silver and gold.
Since they have both quickly moved up to their previous resistance highs we offer some additional background information and another idea for a potential upside breakout.
Gold (cash) at 994.40 is within 12.03 of testing the previous high at 1006.43 made on February 20, 2009. That move began on October 24, 2008 at 682.75. The current uptrend began with at the low of 905.09 on July 8, 2009. Once above 1006.43 there will be no previous resistance to overcome.
Silver (cash) 16.23 is just within .115 of testing resistance made on June 3, 2009 at 16.345. However, there is 6 months of previous resistance in the 16 area as well as the July 14th high of 19.475 and the March 2008 high of 21.349. There is a lot of resistance for Silver to overcome.
Silver bulls point out the gold to silver ratio at 61 is abnormally high, indicating silver is underpriced relative to gold. Since more than one-half of silver production is a "by-product" from copper, lead and zinc mining there is some doubt about the current relevance of the gold to silver ratio. They also point out China is now encouraging its citizens to buy gold and silver and since silver is less expensive it is more likely to be accumulated by retail investors.
Our view is gold and silver are both overbought and are facing resistance at the current levels. In the event the momentum continues, we think a carefully structured low cost position is a prudent strategy. As an addition to the current portfolio, here is one idea to consider.
Silver Wheaton Corp. (
SLW) 11.59. Vancouver based SLW has long term contracts to purchase all or a portion of the silver production from mines in Mexico, Sweden, Peru, Greece, Portugal, Canada and the United States, at a low fixed cost. Operating at low a low cost provides leverage to increases in the silver price while mitigating the downside risks associated with traditional mining companies and they do not sell silver forward.
