Let’s face it, in terms of image, cowboys and traders have really been knocked down a peg over the years.  The cowboy used to be the American symbol of a confident, self-sufficient kind of guy.  Didn’t need anything from anyone (“Ma’am”).  Now if you see someone dressed like a cowboy you tend to think either, a) that the Village People are in town for a show, or b) that “that jerk better not start smoking in here!” 

The same sort of goes for traders.  There was a time when a floor trader or even an independent off-floor guy represented that same gunslinger persona.  On his own, calling his own shots (so to speak), making it on his own or going down with both guns blazing, whatever, the bottom line is you knew you were dealing with a rugged individualist (OK, or at least with a person who fancied himself to be a rugged individualist until his money ran out).  Nowadays a successful trader (i.e., one who makes a boatload of money) is more likely to be pilloried as a “greedy, non-fair share paying 1%er, who needs to give back to the society that allowed him to become rich.” 

Yes indeed, tough times for rugged individualists.

Still, despite all of this, human nature being what it is (and with no cure in sight) lots of people still have this crazy “hankerin’” to make a lot of money in the financial markets.  So even though it is presently out of vogue and frowned upon in certain circles let’s consider one simple idea.

Going for the Gold, er, I Mean Silver

Figure 1 displays a weekly bar chart for spot silver with the latest Elliott Wave count from ProfitSource by HUBB overlaid.  As you can see, despite the fact that silver has been in something of a freefall of late, the latest count is still projecting a potential move to sharply higher prices in the months ahead. 

OK, this would be a really good time to issue a caveat.  So here goes: not all Elliott Wave counts that project sharply higher prices actually pan out.  I know that may come as a shock to some and as a disappointment to many but reality is, well, pretty darn realistic at times. 

Figure 1 – Weekly Silver with Elliott Wave Count

So one possibility for the true “gunslinger” would be to buy silver futures contracts.  Of course, it should be noted that a lot of gunslingers back in the day ended up dead.  It should also be noted that since peaking in May 2011 about 81, silver has declined to about 43.  With a silver futures contract a one point move in price equals $5,000.  To put it another way, a trader who bought at the top and is still holding a long position (may I suggest a course on risk control and money management?) is presently sitting on an open loss of $190,000.  Like I said, a lot of gunslingers end up dead.

So perhaps buying a silver futures contract is not your thing.  Not to worry.  Because the marketing people stay up late.  And although many ideas don’t pan out (single stock futures anyone?), others stick and offer great opportunity.  For example, ticker SLV is an exchange-traded fund that tracks the price of silver.  Therefore buying shares of SLV allows you to profit if the price of silver rises.  As I write SLV is trading at $27.24, so to buy 100 shares would cost $2,724 (which for the record, completely eliminates the risk of losing $190,000).

In Figure 2, we can see that the Elliott Wave count for SLV is also projecting a potential rise above $50.  So if that were to pan out, a trader who bought SLV around $27 could stand to roughly double his or her money (did I mention that not all Elliott Wave counts work out as projected?). 

Figure 2 – SLV with Elliott Wave Count

A Different (Slightly More “Wild-Eyed” Approach)   

For the record, I am all for a well thought out approach to investing.  But the purpose of this article is to highlight something slightly different.  For one of the great things about using options is that they allow you to “try” things that you might normally never consider.  For example, most of us would never consider buying a silver futures contract.  And let’s be honest here – that’s probably a good thing (if you are confused about this point, please go back and re-read the part about the open $190,000 loss). 

A lot more people might be inclined to buy 100 shares of SLV since it is more like buying a regular everyday stock.  Still, $2,724 on a shot in the dark may be a little steep for some.  Fortunately, there is yet another alternative.  Figures 3 and 4 display the particular of the following position:

-Buying 2 January 2014 SLV Calls @ $4

Figure 3 – SLV Jan 2014 Calls

Figure 4 – SLV Jan 2014 Calls

A few things to note about this position:

-The cost to enter the trade and the worst case possible loss is $800. 

-This trade gives you until January 2014 for silver to make a move to the upside

-The “delta” on this position is 103 which means that at the moment it is essentially equivalent to buying 103 shares of SLV (but the cost is only $800 instead of $2,700).

-If the Elliott Wave projection did work out (did I mention that they don’t always?), this trade could generate a profit in excess of $4,000 on an $800 investment.

Summary

Do most of us ever really think about speculating in silver?  Probably not.  And among those of us who do, how many will ever actually buy a silver futures contract, or even buy and hold shares of SLV for the long-term?  Who knows?  But the real purpose of this article (besides ensuring that I receive my next paycheck) is to point out that it is in fact possible to engage in what many would consider to be “wild eyed speculation using those risky options”, with a relatively low dollar risk (in this case risking $800 over the next roughly year and a half).

So for all of you rugged individualists out there, repeat after me:

Yippe Kie Ay!

Jay Kaeppel
Staff Writer and Trading Strategist

Optionetics.com ~ Your Options Education Site

NOTES:

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