Recent action in iShares Silver Trust (SLV) has proven once again that traders need to be so careful when using options to put long deltas to work. The intermediate decline in silver is now almost 3 months old. You can bet that many traders have been early to this trade as plenty of false bottoms have already appeared.
We remain long our core precious metals positions and remain ready to add once we are convinced the intermediate cycle low is in. SLV is now on week 26 of its broader intermediate cycle. It topped out on week 14. This means that SLV is now at risk of printing a left translated cycle (early top). Left translated intermediate cycles usually bring in yearly cycle lows which are excellent buying opportunities when they take place.
Whichever way SLV trades over the near term, it is crucial that options traders wait for convincing evidence that the intermediate cycle low is in. One such way, for example, would be to wait for the slow stochastics to cross over on the weekly chart and begin to move up aggressively.
When purchasing call options, for example, instead of buying the ETF outright, it is crucial to set up the trade correctly. Here is how we intend to do it and why we chose SLV in the silver market.
- We all know that call options give significant leverage to the trader. The shorter the respective trader goes out in time, the cheaper the respective call options due to the fact that the options have less extrinsic value. Although in the trading/investing universe, we are taught to buy stocks as cheap as possible, in the options world, the opposite is actually true if one wants to give themselves the maximum probability to profit. Going deep in the money and going out as far as you can in time is the best course of action in that it gives the trader the highest probability of success on the trade. Why? Because buying a deep in the money call option with something like a 90+ delta basically means that the option will trade more or less the same as stock. Furthermore, by buying the option with an expiration date 2+ years out in time, the loss of time value will be very small compared to more near-term options. Swing plays in the silver sector usually last 3 to 6 months, so significant theta decay should not be an issue with this option. We have already seen that the present intermediate top in SLV topped out after 14 weeks. Our objective always when using options in SLV’s intermediate cycles is to exit at the intermediate top. Yes, we may be giving up significant leverage by buying options with heaps of intrinsic value but the aim is to control greed here.
- We expect SLV to be able to take out its 2019 highs in the next intermediate cycle. Now some traders would suggest using other products (especially in the mining sector) where a higher return would be a distinct possibility. The reason though we stick with SLV especially when using options is because of its liquidity. Having low bid/ask spreads in highly liquid products is essential to achieving sustained profits when trading options.
- The daily chart is where we see the initial signs of a change in trend. As we can see from the chart below, SLV’s 4-day moving average has moved above the 9-day but has yet to move above its 18-day. A convincing move above the 18-day would be the first sign of a sustained trend-change. Furthermore, if we do indeed get this swing in the near term, we expect the MACD histogram to follow suit and start trading in positive territory. Stronger buying volume on the daily chart would also be a strong signal that the intermediate cycle low has been confirmed.
To sum up, we expect SLV to print an intermediate cycle low any day now. It definitely is in its timing band. Let’s see how the rest of the week plays out.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SLV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.