Gold/Silver: The March 2022 Silver Options Strategy

We had an action-packed week in the markets with a twist on Friday that will have me working overtime this weekend to figure out. I can quickly grasp the S&P 500 pushing to a new record high while I cannot wrap my head around 10-year yields falling to a 3-month low. In addition, the Dollar Index surged, sending Gold back under $1900/oz leaving me to believe that the Fed is in there flexing their monetary muscles. Finally, the Platinum rally has stalled on news that the chip shortage has halted auto production, leaving us temporarily with increased supply and decreased demand structure.  The only metal that appears to have it right is Silver, and prices rose 57% since last June when commodities and inflation had bottomed, and the technicals look to set up for another potential breakout. To further help you understand the quantitative analyses of the precious metals markets, we created a free “Gold Trends Macro Book,” which has been updated with silver slides. You can request yours here: Free Gold Trends Macro Book.

Over the past 13 years contributing to Kitco, I have spoken to many of you, and you have indicated that you are “physical stackers.” I respect that; I spent much of my 20’s amassing a small central bank’s worth of bullion that eventually became so large I currently have to rent vault space at a financial institution to house it. Will I ever sell? Probably not, it’s too much of a pain to move, plus I would need to find a trustworthy buyer, have to deal with the spread on the physical, and try and time it with the rapid price fluctuations. Heck, my luck, the Reddit crowd will target Silver this Monday at $32/oz; we will see a surge to $40 by Tuesday, Wednesday I’ll have the pickup truck finally loaded. Then, while looking to offload it somewhere, we will be trading back at $28.50 when the paper comes in and sells the daylights out of it. So I guess I’ll be a long-term “collector of the physical” and let my future kids deal with it when I pass on in another 50 years, just like a boat, car, house, etc. 

March Silver Strategy
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Now let’s say I wanted to take another approach utilizing the futures and commodities markets. Silver happens to be one of the most liquid markets, trading nearly 23 hours a day and bid offers closely resembling the spot market. With the firm belief that Silver will continue to trend higher over the next nine months, we are recommending to our clients with as little 5-10k in risk capital to position themselves in a calculated risk “call spread” with a 1:3 risk to reward scenario. 

We are constructing the spread by purchasing the March 2022 Silver $29 call while simultaneously selling the March 2022 Silver $31 call. Since Silver futures are 5,000-ounce contracts, every one-cent move represents $50, and every dollar move represents $5,000. Since this spread is two dollars wide, its maximum value would be $10,000, and the current cost of the spread is 50 cents or $2,500 plus any commission and fees. That also represents your maximum risk. The maximum gain would occur with the price of March Silver Futures closing above $31/oz at expiration on February 23, 2022. Maximum gain is $10,000 minus $2,500 (cost) minus your commission and fees leaving you around $7,425 (give or take your brokerage). The spread anytime the futures are trading can be liquidated before the expiration; however, it may not capture the entire max profit due to the time remaining. If you would like to learn more about the strategies we are implementing or learn more about technical analysis, we created a guide to provide you with all the steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here:  5-Step Technical Analysis Guide to Precious Metals.

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