Thursday, April 21, 2011

Parabolic Metals

When you begin to see words like "parabolic" used to describe the run-up of an investment, ya gotta begin looking at the other side of the mountain.  How do you play the upside? How do you play the inevitable downside? And, of course, when will the downside occur?
The scorching run in silver has been even more impressive than that of gold, but now some traders are betting on a sharp reversal by year's end.

The iShares Silver Trust (NYSEArca:SLV) hit another new high this morning, currently up 1.65 percent on the day to $44.85. The exchange-traded fund, which was below $18 in August, found support at $26 in late January.  [ Large trade bets silver will reverse course ]
 Now, if you thought the ups and downs of tech stocks caused butterflies in your stomach, that's nothing compared to the Sopwith Camels that put and call options can generate, but the options market is the place to play both upside and downside.  There's nothing like the certainty of the final stages of a bubble in which to hone your understanding of when to use calls and when to use puts:  my puts on ZSL are perfectly weird example--profiting from the downward pressure of an inverse ETF caused by the upward pressure of the underlying commodity.

One thing to note about options: people spend oodles of time trying to figure out the bid/ask spreads to identify best in/out times, etc., and to identify the value of an option, being overly mindful of both time decay and intrinsic value, if any.  My advice: forget all that.  Just be aware that you'll generally buy in at the ask and sell at the bid. As soon as you buy, your option will be priced at the bid price, versus what you think you bought it for--the price gyrations of that bid price is what you're watching, not your buy-to-open price.  Also, unless you have the support of your convictions and the market be damned (like my OOTM leaps on CROX), consider buying options that others have clearly bought (based on open interest)... that way you know others have also considered the possible outcomes of the trade in question.


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