In Fed Guessing Game – Silver Market Offers Way to Play Both Sides

In Fed Guessing Game – Silver Market Offers Way to Play Both Sides
Sep

13

2016

In Fed Guessing Game – Silver Market Offers Way to Play Both Sides

Here we go again.

As investors hold their breath, media pundits examine every possible scenario in next week’s Fed meeting at Jackson Hole.

janet-fed

“They will.” “They won’t.” “Here is what we think.” “This is the stock to own when they do.” “This is the stock to own when they don’t.” Here we go again. Waiting on the Fed. If you even stay remotely tuned into the markets, you’ve seen this game being played for over two years now. So let’s call it what it is – A crap shoot. Personally, I find it hard to believe that the Fed does anything to rates only weeks before the most bitterly contested presidential election in decades. But I don’t put capital at risk on personal beliefs. I only risk capital when facts and odds clearly favor my position. As an option seller, following this philosophy is a good way to avoid market noise and focus on your bottom line. To that end, you may find the silver market currently offers a way to benefit from the Fed racket without choosing a side. Here is how.

Silver – The Great Balancing Act

As we discussed in our August 29th Market Update Video, silver prices are caught between a set of balancing fundamentals.


On the bull side, you have:
  • Negative interest rates around the globe (driving capital to hard assets)
  • Growing investor concerns about the US Stock Market (bringing “flight to quality” and diversification buying into metals)
  • The “status quo” belief that the Fed leaves rates alone until after the election (theoretically weakening the dollar and helping to support asset prices)

On the bear side, you have:
  • The growing school of thought that the Fed raises rates this month or in December in light of more “encouraging” US economic data.

    grph-usconsumerprice

    US Consumer Price Index, a major gauge of inflation, is back below 1% and continues on a trendline lower. (source: The Hightower Report)
  • The near non-existence of inflation – of which gold and silver prices are thought to be a direct gauge.

Which Side Wins?

This is the rub: Neither side wins. In option selling, you don’t have winning or losing. You can make handsome profits from shades of gray (not the book title either). Flight to quality buying and a passive Fed could very well continue to support prices in the coming months. But a lack of global inflation will continue to be a major drag on precious metals prices. In addition, silver, which (unlike gold) borrows some of its price cues from actual industrial demand (see our Silver piece from March – A Tale of 3 Sisters), could see further pressure from stagnant global growth. Lackluster demand for industrial metals has recently dragged copper prices to multi-year lows.

Weekly Copper

Weekly Copper

  Copper prices continue to hover near 5 years lows, primarily the result of lackluster global demand for industrial metals.

Conclusion and Strategy

Silver prices could very well lurch one direction or the other on next week’s Fed announcement. But given the gridlocked state of its overall fundamentals, it’s our opinion prices won’t have the impetus to run too far either way. Fortunately, with strikes now available so deep out of the money, investors can benefit by selling options on both sides of the market. (For those new to commodities options this is called an option strangle. For more information on how to properly write a strangle, watch our strategy video on strangles – www.OptionSellers.com/strangle.) We’ll be working closely with managed accounts in selling a series of balancing puts and calls over the next several weeks.

March 2016 Silver

Weekly Copper

  Selling the March Silver 15.50 puts and 26.00 calls (strangle.) Non-client, self directed traders can consider selling the March Silver 15.50 puts and 26.00 calls. Current premium for the strangle is $1,600 each. More conservative traders can consider turning these into credit spreads.
James Cordier is co-author of McGraw-Hill’s The Complete Guide to Option Selling and head trader at OptionSellers.com – a wealth management firm specializing exclusively in option writing portfolios for high net worth investors. For more information on accounts with James and his firm, visit www.OptionSellers.com/Discovery for a free investor discovery kit.(Recommended investment: US $1 MM)

Leave a Reply

Your email address will not be published. Required fields are marked *

Share This

Share This

Share this post with your friends!