Summertime Gold in the Quiet Silver Market
Silver prices have been all but stagnant since mid 2017. For option sellers, that can be a recipe for big profits.
Memorial Day is in the rear view mirror and summer is unofficially underway.
And while you may be getting ready to hit the links, the water or head into some cool mountain air, you may want to bag a little option premium before you go.
…despite ongoing geo-political tensions with Russia, Iran, and North Korea…investor demand for silver is literally “in the tank.”
Option premium in gold and silver have remained high all year. These markets have been cash cows for our portfolio in 2017 and the first half of 2018. Why? No outstanding fundamentals pulling the markets one way or another. No discernable seasonal tendency. Just a boring, balanced set of economic data and market fundamentals that have allowed this market to do, well, nothing.
And while such price movement typically pushes a market to the back page of the newspaper, such markets can be gold mines for option sellers.
This month, you’ll learn how silver can offer you opportunities for taking some high odds, low stress premium – the perfect investment for sittin’ on the dock of the bay.
Investor Demand is Down – Way Down
Silver shares many of the same fundamentals of its more glamorous sister, gold.
Like gold, a bar of silver is a physical manifestation of financial security . You can hold it in your hand. If the market crashes, a building blows up or a currency devalues – your lump of security remains firm – there, unaffected.
This is why historically, in times of fear or geopolitical strife, gold AND silver demand can bump up.
And yet, despite ongoing geo-political tensions with Russia, Iran, and
North Korea, a sitting US president under investigation since taking
office, a potential trade war with China, and the questionable status of
NAFTA, investor demand for silver is literally “in the tank.”
Investment demand for silver fell by a staggering 52% in 2017 – to 50.2 million ounces of silver on a net basis. In 2018, demand is expected to drop again, although by a lessor margin, to 43.9 million ounces. (*source: CPM Group)
Whatever the source of investor anxiety, silver prices have not been a benefactor in 2018 . In fact, those concerns have largely been discounted as investors shun precious metals in favor or higher yielding investments. This more than anything, has been responsible for silver’s lackluster price movement since peaking at over $21 per ounce in 2016.
Macro View – A Nice Balance
From a macro view, the US remains in an economic environment of rising interest rates. Rising rates tend to hinder price inflation of physical assets. Indeed, despite widespread talk earlier this year, inflation remains largely in check, expected to grow at a rate of 2.6% in 2018*. As silver is often bought as a hedge against inflation, rising rates are not helping the silver cause.
But interest rates are rising largely as a result of a rapidly expanding economy. This ironically, is the same thing keeping silver prices from falling to far.
Investor demand for silver is expected to fall again in 2018.
Industrial Demand is Rising
On the other hand, the US economy continues to strengthen (projected to grow at 2.9% in 2018 vs. 2.3% in 2017 .*)
This is helping to spur fabrication demand for sliver in products such as solar panels (which contain silver in their composition.) CPM group expects forecasts 2018 silver demand from this sector at 107.3 million ounces – up 1.2% over last year.
In addition, demand for silverware and silver jewelry is expected to increase at a healthy clip of 8.9% in 2018.
Growing demand for solar panels is helping to spur commercial demand for a key composite – silver.
And while stocks and the economy seemingly continue to press on, geopolitical turmoil is never far from the front page. As of yet, this has not brought on waves of new silver buyers. But it has kept traders hesitant to press the downside too far.
Thus stable demand from the industrial sector is helping to support silver prices in the face of lackluster investor demand.
These balancing fundamentals have combined to keep silver prices in a defined trading range for the better part of two years.
And until something changes radically, that is likely to continue.
It is the perfect set up for an option strangle.
Conclusion and Strategy
With investor demand for silver falling, the primary demand driver for the white metal in 2018 will likely come from the commercial side. While another wave to the stock market correction or a sudden geopolitical shock could temporarily rally prices , a rising interest rate environment and benign inflation levels should continue to keep a lid on rallies.
Thus, opposing forces on opposite sides of the market balancing each other out.
Silver prices have remained in a fairly predictable $4.00 price range over the 18 months and for the reasons above, we expect them to continue in that range well into 2019.
The good news is, the public appetite for silver options remains robust. Gold and silver options have some of the highest public participation rates amongst the commodities (although banks and institutions are big buyers as well, typically as part of hedge or arbitrage strategies.) Thus, while implied volatility is not exactly at towering levels right now, a steady flow of demand keeps historic volatility high – enough to providedeep out of the money strikes at still enticing premiums.
March 2019 Silver
Selling the March Silver 22.00 call and 14.00 put provides an $8 wide profit zone.
Thus our opinion that writing silver strangles will remain one of the highest probability trades on the board for Q1 2018.
We will continue to implement a variety of strikes and strategies for managed portfolios in the silver market this month.
Self directed traders can consider selling the March Silver 22.00 call/14.00 put strangle for premiums of approximately $1,300 per strangle. Margin requirement is roughly $2,150 per strangle.
Fair value for silver in 2018/19 should fall between the $15-$18 per ounce range. Barring a radical shift in fundamentals, price excursions outside this range should be considered opportunities for building additional positions.
Should you wish to sing “See you in September” to your portfolio, these type of high probability option sales in Silver could generate some summertime gold while you wait for the air to chill again.
Until then, enjoy that sunshine!
(For more information on managed option selling portfolios with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Kit)