Wednesday, April 13, 2011

Why a $1m short-option against July silver is not so crazy

From Arabian Money:

The silver price dropped back below $40-an-ounce as news of a $1 million short-option just written against silver delivered in July circulated through the trading pits yesterday.

Silver bugs will not like this but there is logic here. If the stock market pops, and the rally looks on its last legs as profits expectations are now too high and QE2 is about to end, then commodity prices will be dragged down too.

Trader logic

Now silver has been the best performing commodity this year. Logic would suggest that means silver also has the most to fall in a correction. Capture that price fall with a well-timed option and you make a very considerable fortune. July and August are, for good measure, usually low months in the precious metals price cycle.

Yet this is just a gamble on market timing. ArabianMoney has been expecting a stock market correction for over a year and has been wrong, albeit our enthusiasm for precious metals has been ample compensation.

So the event that will make this anti-silver bug a fortune may just not happen. Or, more likely, it will happen but not as this speculator hopes. Silver could indeed plummet for a few weeks and then rebound even higher by July, leaving this guy $1 million out-of-the-money.

Timing silver prices is a fool’s errand. Unless you have a time machine your only hope of catching the upside waves of this highly volatile commodity is to stay fully invested for years until you have such a fantastic profit that you decide to cash on

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