Silver has staged an impressive rally this year, climbing 33% year-to-date. For investors who are bullish on the metal but prefer to establish a long-term position at lower levels, selling put options on the iShares Silver Trust exchange traded fund is a compelling strategy.
Silver holds the dual titles of both precious and industrial metal. It's used as a store of value as well for industrial uses such as solar panels, electronics and batteries.
With shares of the silver ETF trading near 35.15, investors can consider selling a put at 34 with an expiration of Dec. 19. This put can be sold for a credit of $1.25 a share.
For a typical 100-share contract, this equates to a profit of $125. Investors will realize that if the silver ETF remains above 34 on expiration. The break-even price on this trade is if the fund trades at 32.75 on expiration.
Silver ETF Depends On Precious Metal Pricing
This trade will usually realize a profit. But if the price of silver falls substantially, the trade will incur a loss.
While many traders incorrectly perceive a put as risky, the position actually equates to a covered call. That can be created by buying shares of the silver ETF, then selling an in-the-money call at a 34 strike price.
Generally speaking, higher premiums make selling puts preferable on stocks with higher implied volatility, as long as realized volatility is low. December-expiration options in the iShares fund have an implied volatility of 25.5%,
That's above 30-day and 200-day realized volatilities of 18% and 25%, respectively. This leans high, especially when considering the current muted implied volatility in gold and the S&P 500.
Is Silver Still Second Best?
Shares of the silver ETF have performed strongly, up 33% year-to-date. Still, in the long term, the metal has continued to underperform gold, with a gold-to-silver ratio currently above 87. That means 87 ounces of silver is equal to one ounce of gold in value.
That level is particularly high historically. It also remains peculiar, considering estimates show unmined silver at only 10 times that of gold. Furthermore, while aboveground stocks of silver are also higher, the vast majority of that supply is in industrial equipment and remains uneconomic to recycle.
Any slowdown in industrial demand or a stronger-than-expected U.S. dollar could send silver prices lower. Nevertheless, with the Fed currently signaling to cut rates, inflation still above target and a rapidly expanding debt bubble, there are a lot of potential tailwinds for silver.
Shares of the silver ETF broke out of a consolidation pattern in early June, passing a 31.42 buy point. The iShares fund has since trended higher, having found support at its 50-day line.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
