Silver plays to make your portfolio shine

No nickel and diming here, silver is definitely on a roll. The silver ETF, the SLV, broke $35.60 resistance today on its way towards the stratosphere–$80-$150 as some analysts predict. Those of you who are looking to get in but think that you may have missed a major move, well, you have. That’s the bad news. The good news is that technically, silver is showing that it has a lot more room to run before its luster begins to tarnish.

This metal is the poster child for the adage, “Buy high and sell higher.” The daily chart of the most popular silver ETF, the SLV (chart below), shows that silver has been on fire since rebounding off its low of $8 and change in October of 2008. Since then, it’s run up an eye-popping 350%. By comparison, gold (as given by the gold ETF, the GLD) has risen by 100% and the S&P 500 has “only” gained 90% since its March, 2009 low.

So, what’s the best way to profit from the continuing rally in silver? Excluding the futures market which can be too costly, not to mention too risky for many home investors, or hoarding small change in your cookie jar, what are the best plays?

Let’s compare the popular choices.

The long funds

You could do your due diligence and select those silver miners you think have the most profit potential. Or, you could be like the 98% of the rest of us who don’t have the time to sift through quarterly reports and listen to trumped up conference calls (not that Dr. Kris has an opinion on this) and go straight to the silver ETFs.

Here, you do have some choices. The long ETFs are these (shown with their average daily volumes): SLV (33M), DBS (165K), SIVR (809K). The SLV is by far the most popular. It’s made up of silver bullion that is non-deliverable. If you’d like to take delivery in silver, then the SIVR is for you, but you’ll need to consider storage expenses and fees. The DBS invests in silver futures but is subject to roll-over problems (contango and backwardation) that affects futures markets.

Only you can know what’s the proper investment vehicle for you.

The leveraged funds & fund options

If you’re wondering if there are leveraged silver funds, the answer is yes. The AGQ is the double-long ETF and the ZSL is the double-short. The reason the ZSL is included in this discussion is because you can short it (as far as I know) which is a perverse (and risky!) way of going long, but some folks (aka: da Bears) like it.

All of the above-mentioned funds have options. You’re welcome to play them but only the SLV has a liquid field, and it’s the only one we’ll be considering.

So, given all this information, what’s the best way to cash in on the silver rally?

A trade comparison

To get a feel for how a trade might play out in today’s silver market, let’s go back to when silver first broke out of its base on 9/3/10 and put on some trades. We’re going to compare the SLV with the double-long AGQ. We’ll also be shorting the double-short ZSL and buying the 2012 & 2013 January 20 call options (LEAPs) on the SLV.

Just in case we missed the first breakout on 9/3/10, we’ll be getting into the trades at the subsequent breakout points on 11/4/10 and 2/17/11.

Here are the results:


It’s no surprise that the double-long (AGQ) did better than the long (SLV), but doing better than twice as much is a nice surprise (that’s probably due to the variations in the underlying holdings of each). You can see that shorting the double-short didn’t do nearly as well as just going long. (I’m wondering if this is the case for other ETF families?)

It’s also no shock that the options trounced everything else. The Jan 20 2012 LEAP call beat the SLV by 4.7:1, and it beat the AGQ by almost 2:1. What’s so great about options is that when you’re right, you’re righteous; but when you’re wrong, you stand to lose all of your investment. If silver reverses trend and moves down and goes below the strike price of your options at expiration, the most you can lose is the price of your investment, which would be $340 per 100 shares of stock in this case.  Should the stock move down further, you’re not losing any more money, but if you had owned the stock (and didn’t sell it in the meantime) you’d now be losing money. 

The best thing about LEAPs is that they afford you a lot of time to be right. On the way, should your stock or the market turn against you, you can write calls against your long LEAP position to generate income and cut potential losses.

Looking forward

If you think silver might be heading upward but are unsure of how high it will go and don’t want to risk a lot of money, consider a bull-call debit spread.

As of today’s close, the 2012 January 35 Call on the SLV is trading for $5.40 and the 2012 January 45 Call is trading at $2.05. Here, a bull-call debit spread would cost $3.35 per contract. The maximum realized return on this investment, should the stock trade at or above $45 at the third week in January, would be $6.65 ($10 – $3.35), giving a maximum return/risk of nearly 2:1.

Hi-ho Silver!

Leave a Reply

You must be logged in to post a comment.