SLV Analysis

The iShares Silver Trust (SLV), which tracks silver bullion, broke below the 20-day price channel on Monday and confirmed the bear signal on Tuesday.

I'm looking at SLV as a potential very short-term directional trade.

SLV has Weeklys in its options inventory, I shall use the APR series, which trades for the last time three days hence, on April 24.

[Silver as an investment in Wikipedia]

SLV

Ranges

Click on chart to enlarge.

SLV at 12:25 p.m. New York time, 30 days hourly bars

Implied volatility stands at 27.4%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. SLV’s volatility stands in the 59th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	15.69	16.07	16.58
Lower	14.93	14.55	14.63
Gain/loss	2.5%	5.0%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

I'm wanting a very short term trade in the form of a bear call spread. With the stock around $15.30 or so, the by-the-book position on this grid would be short the $15.50.

Bear call vertical spread, short the $15.50 calls and long the $16 calls,
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4	Strike	OTM
	15.5	61.4%

The probability of expiring out of the money is below one standard deviation (68.2%). And the risk/reward ratio stands at 5.3:1, which is quite high even for a vertical.

I could get better results by moving it out to the MAY1 series, which expires May 2. With the additional time, the probability of expiring out of the money declines to 58.8%, while the risk/reward ratio shrinks to 2.6:1.

I can trade time for results. However, only half of SLV's bear signals have been successful over the past year, suggesting that adding time also adds significantly to risk in the case of this symbol.

Decision for My Account

The numbers don't work. I'm passing on SLV. No trade.

-- Tim Bovee, Portland, Oregon, April 21, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.