Wednesday, January 30, 2013

Bullion Baron's SLV Call Options: Performance

As I mentioned in a recent post, I have been building a position in call options to capitalise on the next burst higher in Silver (2 year time frame):
I've been accumulating $38 & $50 January 2015 Call Options in SLV for around $2.30 and 90c respectively. If Silver was to hit $68 (before expiry) which is the lowest of targets provided above, each option with $38 strike would be worth $30 (having paid $2.30 that's roughly 1200% profit), each option with $50 strike would be worth $18 (having paid 90c that's roughly 1900% profit). Purely as an example if someone put $5k into each (50/50 between the $38/$50 call options) and closed the positions when Silver hit $68, the $10,000 would have been turned into around $165,000. That is the sort of leverage they provide, but on the flip side should Silver not be above the strike price when they expire in January 2015 (if you haven't sold out for a profit prior) then you lose your entire capital (whatever you paid for the options, in this example $10,000).

Further to risk of complete loss (if options expire out of the money), the options are traded on the US market so your funds are converted into and out of USD (from AUD, for Australian based readers), there is the potential the gains aren't as significant if the AUD has appreciated further against the USD (or profit would be higher if AUD has dropped).

This far from covers every angle of options and the risks involved such as time decay and other factors, but perhaps provides some context to the reasons for using them (the leveraged profits possible) if you expect a particular outcome. And at the end of the day the only capital at risk is the 10% I'm prepared to forgo should the Silver rally I'm expecting not eventuate. Bullion Baron: Silver To Shine Again: Prepare For A Burst Higher
I've decided to post a table showing representative performance of the options purchased, but please remember the site disclaimer: 
"The content on this blog is the opinion of the author only and should not be taken as investment advice. No site content should be construed as a recommendation. Any action that you take as a result of information, analysis or advertisement on this site is your responsibility."
While the amount of capital speculated in the portfolio pictured below is significantly smaller than my actual account, it does represent the same breakdown and entry prices so it will track the performance of the options I hold (% gain or loss):

You couldn't actually construct a portfolio exactly as pictured as the SLV options are sold in contracts of 100. The table is to measure performance only, not to be replicated.

The portfolio is currently sitting around 7% in the red after some recent price weakness in Silver. The plan is to sell the Jan 2014 call options in the first half of the year into a strong rally and use that capital to add to the Jan 2015 options position (potentially waiting for a pull back to do so, rather than rolling).

I will update the table following any large changes to value or events (buy/sell).

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.


 Buy bullion online - quickly, safely and at low prices


  1. With last nights Silver spike the options portfolio went from -7.34% to +2.21%. Will be a volatile ride.

  2. Have you thought about a calendar spread? Buy the 2015 Jan Leap option and sell front month option. It's a more conservative strategy. The action recently is for the delivery month gold and silver futures contract to be hammered prior to options expiration-witness Jan 2013. The price of the metals is climbing again since the foot has been taken off the throat. It's likely to continue until the metal runs out.

    1. Wouldn't this require a relatively stable price to avoid the front month option eating into profit?

      I'm not looking for conservative with the position, it's essentially for maximum leverage to an expected price spike which I can set & forget without risk of margin call.

  3. Not necessarily. This strategy will make money in flat or rising markets. If markets go down, you will lose money, but not as much as if you just buy an option.

    If silver goes exponential then you may lose money. This is because the Delta for the near month option is greater than that of the LEAP. In other words, the price in the stock moves the near month option by a greater amount.

    It really depends whether you want to 'swing for the fence' or try and accumulate money more conservatively. Most option traders will buy an out of the money, near month option which has the greatest amount of time decay. This provides an opportunity to sell them this and profit, particularly in a manipulated market.

    I think buying a LEAP which is slightly out of the money is a good strategy. The $50 option is probably too far out. You can always 'leg in' to the spread to protect some of your profits if silver goes on a tear.

  4. Hi.

    I had not considered options for silver and take advantage of leverage. This sounds like something that appeals to me and am quite interested.

    So thank you so very much for the information but i am going to be asking a rookie question and hope you willing to answer.

    Could you please advise how i can go about purchasing options or point me towards some info ? Can it be done on the ASX or what platform is required?

    Again, thank you for this wonderful recourse

    1. I opened my positions via

      Just be careful you understand the risks (e.g. loss of 100% capital possible, exchange rate changes, etc) and take care when opening a position that you action the right trade type (buy to open in my case). And understand that I am not an options expert, I have had mixed results with company options on the ASX and this is first time I've used US based options. But otherwise glad you find the information useful :)

  5. Thank you for your prompt response Sir Baron!

    Well written and informative.

    Wishing you successful trading results.

  6. I agree with the Baron. Make sure you understand the risks. With the correct strategies, options don't need to be risky. Guy Cohen writes some good introductory books on Options.

  7. "I will update the table following any large changes to value or events (buy/sell)."

    On that basis it's time for an update. You reported a change of loss from 7% to 2%. Surely you must report a change of loss from 2% to ~30% loss.

    Seem to be going the same way that your BSROA options went.

    1. Good observation Shadow/Strindberg. Yes they are around 30% down (overall). But with 1-2 year time frame there is plenty of time for them to turn around. Been too busy to update table, but will do so in near future.

  8. very informative, nice work BB

    slv calls look great in theory, hope it plays out, if you don't mind the q - hows your pm folio look atm? mines probably a little too aggressive, have stuck with the better producers listed on the ASX

    10% slv calls
    40% physical, mostly silver
    50% ASX goldies

    1. They've taken a fair hit in value since buying (the call options), around 50% off my buy prices even after averaging down a little. I'm sitting around 12% SLV calls and 88% physical. I haven't held any miners in my personal account for sometime now, but do hold some in my super. Many of those were purchased in early 2010 with a couple of top ups since, they are barely breaking even at the moment. It's been a pretty boring 18-24 months, but I am convinced that higher prices lay ahead, just a matter of waiting it out, does require patience though!

  9. yeah same here, been mainly into physical but started looking at miners in august last year, bought in the middle of that mini run up we had, got out and made a bit but then got in again way too early, sitting on at least a 10% loss atm.. am tempted to finish off my miner allocation today with the drop overnight but safer to wait until we break this descending trend line.. that being said you would think at current prices there is little downside

    its been a mammoth correction but we know that just means a more violent over correction to the upside.. its funny, been a losing bet so far (if you pick days like today), you'd think i'd be more bearish but really im as bullish as i ever have been and get even more so as time goes on

    re US options - looks like there is a 30% withholding tax for foreigners

    any idea what the story is on the leaps? i've come across conflicting information, i think there is a reduced rate for long term optoins, but no idea what that is

    1. Not sure to be honest, but suspect I will be going to an accountant once I start selling rather than doing my own. I am pretty sure there is a treaty in place to avoid double taxation, but unsure where the tax will be applied (here or there).

  10. Good day! This is kind of off topic but I need some
    advice from an established blog. Is it difficult to set up
    your own blog? I'm not very techincal but
    I can figure things out pretty fast. I'm thinking about setting up my own but I'm not sure where to start.
    Do you have any points or suggestions? Thanks

    Take a look at my site; ลดน้ําหนัก