Silver Calls offer High Odds Premium to Investors Now
Whether Your Focus is on the Fed, China or Global Demand, Expect Pressure to Stay on Silver Prices through End of 2015
Silver holds a special place in my heart as it is the first market that ever made me any money. As a teenager, I took an interest in coin collecting. Many of the coins in my collection were silver. When the Hunt Brothers cornered the silver market in 1980, they managed to make my collection worth a considerable amount for me at the time.
Call it an ingrained bias.
Silver can also be a superior market for option selling investors today. Because of its unique characteristic as both a monetary gauge and industrial metal, many traders are puzzled as to what really makes it move.
This can provide opportunities for those that understand the white metal. And in light of this month’s focus on the Fed, there is no more relevant market in which to take premium.
Silver as Financial Instrument
Like gold, part of silver’s value is made up from its use as an inflation hedge. That means understanding its relation to the dollar. At the risk of grossly oversimplifying, a stronger dollar is bearish silver. A weaker dollar is bullish silver.
Thus, the Fed moving to raise rates could be bearish for silver (strongly bullish for the dollar.)
At the risk of grossly oversimplifying, a stronger dollar is bearish silver. A weaker dollar is bullish silver.
However, if the Fed holds off, as many now believe it might, it would be less bullish for the dollar and thus less bearish for silver. We use these measured terms because we believe a dovish Fed this month will not necessarily translate into a steep correction in the dollar. In fact, with increasing concern over China, Europe threatening to stall out again and a growing trend toward monetary easing around the rest of the globe, the US will likely remain the “best of the worst” when it comes to currencies.
Despite the recent setback, the Greenback should remain the “Best of the Worst” when it comes to currencies.
While a Fed “non-move” could be an opportunity for entry into a silver position, we feel it would be neutral to silver prices over the longer term.
Silver as Industrial Metal
While silver can often take on characteristics of gold in a financial role, it also borrows tendencies from its more industrial cousins. With nearly 60% of silver demand tied to industrial use, silver could be classified as an industrial metal. Silver is used in a variety of industries and products including photography, electrical appliances, glass and as an antibacterial agent in the health industry.
In China in particular, demand for ethylene oxide (a critical building block chemical derived from silver) used in production of plastics, solvents and detergents was expected to surge 61% in 2015. How that plays out now remains to be seen. China is the world’s second largest consumer of silver, accounting for 15% of global demand.
Thus, concerns over the Chinese economy have cast a decidedly bearish pall over the silver demand outlook – at least for now.
World Silver Demand by Sector
Silver’s use as an industrial metal has surged in recent years.
Silver’s Less Known Tie to Other Metals
Silver, however, can also take price cues from other industrial metals. Silver is mined with (and is often found combined with) other elements such as copper and zinc. Thus, changes in the suppy/demand equation for these metals can spill over into silver prices. For instance, if demand for copper wanes, supply stockpiles can build for both zinc and silver as well.
Thus, when one considers the current state of demand for copper (see page 1 – China accounts for up to 49% of global copper demand), its potential influence on long term silver price cannot be discounted.
With continuing fears of Chinese slowing and a potential “Asian contagion” (Japan and South Korea are also major industrial consumers of both copper and silver), the industrial demand sector (or for now – the perception of it) does not look supportive for silver in the near term.
The Play for Option Sellers
While silver prices have remained lackluster for several months, the options, curiously, maintain a certain degree of volatility. We think this stems from continued spec interest off of either a Fed play or general equities anxiety. Either way, it plays well for option sellers who understand the intricacies of silver price drivers.
December Silver has seen lackluster performance in 2015. Yet attractive call premiums are still available.
With the Fed decision this month likely bearish or neutral to silver prices and China concerns probably keeping demand bulls on ice, an impetus for a sharp upside move in silver is probably lacking.
The Premium Sniper sees lackluster price movement for silver continuing through the remainder of 2015. Remember, as an option seller, you don’t have to predict what price is going to do – only what it won’t do. You only care about least likely scenarios. And for the rest of 2015, the least likely scenario would seem to be a sharp and sustained rally in silver prices.
A strategy for monetizing such a scenario could be selling calls or call spreads – at least in the near term.
For those looking to take premium this month, the Premium Sniper suggests the December 20.00 calls for $400-$600 premiums.
Should silver prices get a bump from the Fed decision this month, an opportunity for adding to that position could present itself.
If you are a high net worth investor interested in selling options in commodities, you may qualify for a managed option selling account with OptionSellers.com. To learn more, request your Free Investor Discovery Kit at www.OptionSellers.com/Discovery ($250,000 minimum investment.)
James Cordier is the author of McGraw-Hills The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions. He is also founder and president of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television, Fox News and CNBC. Michael Gross is director of Research at OptionSellers.com. His published research articles have appeared on Forbes.com, MarketWatch, Optionetics.com, Businessweek.com and Yahoo Finance.
*Price Chart Courtesy of CQG, Inc.
Fundamental Charts courtesy of The Hightower Report
Seasonal Chart courtesy of Moore Research, Inc
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.