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

By: Peter Cooper

-- Posted 12 April, 2011 | | Discuss This Article - Comments:

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 out. It is also notable that 2008 aside, silver has performed better than gold in previous financial crises (click here).

Long-term position

You are then speculating only on the future of precious metals, not the wild swings (or lack of them) in the market price. Given that fiat money printing is out-of-control around the world it does not require much judgement to see that the only way is up for precious metal prices with their fixed supply and traditional role as money.

Of course, the $1 million silver short-option could be the trade of the year. Shorting a falling stock market is a route to a fortune if your timing is accurate. But many shorts have lost money over the past 18 months waiting for just that event.

ArabianMoney has silver as our top tip for 2011 (click here). Any price set back now will be more than made up in the autumn, and will most likely just be a dip on the parabolic up curve this year.

-- Posted 12 April, 2011 | | Discuss This Article - Comments:

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