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The Safest Way to Play Silver

So CME, seeing the parabolic rise and volatile movements in silver, made the call to up their margin requirements from 5k to 6.5k. Nothing sinister about this, when something gets more vol, it's in an exchange's best interest (and the customer's!) to manage systemic market risk.

Leveraged Dummies

But with that increase, anyone on a lot of margin was forced to sell. And in a different market environment, this wouldn't be a big deal. Except silver futures and SLV had so many people levered up, that a rush to the exits was had yesterday.

Real healthy market action...

Real healthy market action...

So is there still a silver trade? Absolutely. But the edge lies not in the direction, but in volatility.

I suggested this trade to my subscribers last night, but it requires active management so it's not suitable for adding to our portfolio.The idea was in SLW but could be applied to any silver etf or miner.

The Trade

Here's what you do:

Buy +5 SLW Dec 32 Straddles

Sell -50 SLW Common at mkt

This is known as a long gamma trade. We don't care about the direction, we want a fast move.

Trade Management

Now what you can do to manage the trade is a technique called gamma scalping. You essentially trade stock to put your net directional exposure to 0. When you do this is more an art than a science-- you could hedge at end of day, or every $1 move, or some other volatility measure.

But most likely, there's going to be some wild and fast moves coming up in the silver market, both to the upside and downside. This is certainly a great way to take advantage of it going into Christmas.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/