Reco for those with stomach for risk…..

Posted on 07/18/2011


From my perspective, the run in the Metals is likely nearing it’s apex. As I said late last week, I genuinely believe a resolution to the debt ceiling will happen because it HAS to…..and Canter, Boehner, etc are well aware.

Front month options in both Gold and Silver are pumped up (vol and skew is high).

There is massive open interest in the 1600 strike in Gold and that may act as a magnet at expiration.

The vol on a relative basis in Silver is higher, so I would prefer to sell premium in that market, but I have a healthy risk tolerance.

For those with an appetite for risk, perhaps  you look to SELL TO OPEN the Aug (front month – 8 days until expiration) 43 1/2 calls in Silver for .25. Take in $1,250 in premium. Underlying is 40 1/2 so you’re selling 7 1/2% OTM calls with just over a week to go. Expiration break even, excluding frictional costs, would be 43 3/4, which I consider unlikely in this expiration cycle. Longer term, I think DEflationary concerns will emerge again (unless more QE3 chatter).

If you’re more comfortable with they historically less volatile metal (gold), the “equivalent” call would be the 1720, for which you might collect $550 and your break even at expiration (exclusive of commissions) would be 1725.50, also a level I don’t believe will be breached.

As ALWAYS I’m a fan of having a GTC (good til cancelled) bid to cover short options as you approach expiration. In the Silver example, I would be thrilled to collect .20 of the .25 cents, so I would be a .05 ($250) bid to cover. In Gold, I would cover those calls @ $100 if given the opportunity.

Good trading.

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