When uncertainty grips the market, investors often turn to
precious metals for safety. Well, at least they used to. These days, most of
the action in precious metals is in gold. The price of gold has climbed nearly
19% in 2020 to date. Silver has been okay, up 4% so far this year. Platinum, on
the other hand, is down 12%.
Many investors like gold (and historically other precious
metals) because it serves as a currency replacement not tied to any one central
bank or government. As such, there are a variety of investment vehicles that
can be used to gain exposure to gold. There is roughly the same amount of
access to silver-related investments as well.
Silver has outperformed stocks on a broad basis this year
but is lagging far behind gold in terms of year-to-date performance. On the
other hand, it is up nearly 57% from its low in March. As gold gets more
expensive, some precious metal buyers have turned to silver as the more
affordable precious metal.
One of the most popular methods of trading silver is by using iShares Silver Trust (SLV). SLV is based on the price of silver bullion (as opposed to silver futures). The exchange-traded fund (ETF) currently has over $9 billion in assets under management and trades an average of over 25 million shares a day.
At least one well-capitalized trader is bullish on SLV
through January of 2021. This trade is using covered calls to express this
bullish opinion. Remember, a covered call is when the stock is purchased and
calls are sold against those shares at the same time (and generally at a higher
strike than the stock price).
In this case, two large covered call trades were made with
SLV trading at $17.08. A total of 16,000 calls were sold (versus 1.6 million
shares), 8,000 at the 21 strike expiring in January 2021, and 8,000 at the 22
strike, also in January 2021. The 21 calls were sold for 79 cents each, or
$632,000 in premium collected. The 22 calls were sold for 66 cents each, or
Total premium collected on the trade was roughly $1.2
million. That means the yield on both trades together is 8.5% over the next six
months (approximately). Considering that interest rates are close to zero and
SLV doesnt pay a dividend, thats a heck of a yield.
Moreover, because the strikes are set at 21 and 22, SLV can
climb and average of $4.50 before capping out. If the price of silver
skyrockets, there will be money left on the table, but I dont think the trader
will care too much after hitting max gain of nearly $6 million.
Finally, because precious metals are popular in times of
uncertainty (and low interest rates), there likely isnt a lot of downside to
this trade. Its hard to imagine the price of silver plunging by next January
(especially a prolonged drop in the price). In other words, this type of trade
could be an excellent way to generate a solid yield and gain exposure to
silvers upside potential.
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