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Old 12-15-2011, 04:22 PM   #1
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Lightbulb How to trade the silver VOLATILITY using options

The following is a copy of a post, I originally made after the big silver crash back in may 2011 at Ron Paul Forums: http://www.ronpaulforums.com/showthr...ies-VOLATILITY

I think it´s offering a useful strategy for traders. I made some minor adjustments to the original post.

Note: The following text should not be interpreted as a professional investment advice. Make you own decisions and be sure to fully understand every product you buy.

We see huge volatility in commodities right now.
My opinion is that this is gonna continue for a while.

I trade options regularly and i want to share an investment idea with you. Here is how you trade when you know there are going to be major movements in prices, but you can´t really figure out in which direction they are going to be. In other words: you trade the volatility. Your expectation is that prices won´t stay at the same levels.

Luckily www.optionsguide.com offers a good description of the trade, so I don´t need to write everything down on my own. The trade is called long guts:

From http://www.theoptionsguide.com/long-guts.aspx:
Quote :
The long guts is a neutral strategy in options trading that involve the simultaneous buying of an in-the-money call option and an in-the-money put option of the same underlying stock and expiration date.

Long Guts Construction
Buy 1 ITM Call
Buy 1 ITM Put

This is an unlimited profit, limited risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. The long guts is a debit spread as a net debit is taken to enter the trade.

Unlimited Profit Potential
Large gains for the long guts strategy is attained when the underlying stock price makes a very strong move either upwards or downwards at expiration. The move in the underlying stock price must be strong enough such that either the long call or the long put rise enough in value to offset the loss incurred by the other option expiring worthless.

The formula for calculating profit is given below:

•Maximum Profit = Unlimited
•Profit Achieved When Price of Underlying < Strike Price of Long Put - Net Premium Paid OR Price of Underlying > Long Call + Net Premium Paid
•Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid OR Strike Price of Long Put - Price of Underlying - Premium Paid

Limited Risk
Maximum loss for the long guts strategy occurs when the underlying stock price on expiration date is trading between the strike prices of the options bought. At this price, while both options expire in the money, they have lost all their time value. It is this loss in time value that is the cost of employing the long guts strategy.

The formula for calculating maximum loss is given below:

•Max Loss = Net Premium Paid + Strike Price of Long Put - Strike Price of Long Call + Commissions Paid
•Max Loss Occurs When Price of Underlying is in between the Strike Prices of the Long Call and the Long Put
I would suggest to buy silver-options because this market is the most volatile one.
If you are generally bullish but you want to hedge to the downside, you should basicly do the the same as above but with a 2:1 call/put-ratio. This is called "strap" ( http://www.theoptionsguide.com/strap.aspx)
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Old 12-28-2011, 03:30 PM   #2
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bumping this thread. Still a good trade at the current levels.
I´m already net positive.
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Old 12-29-2011, 07:34 AM   #3
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Closed 50% of my short position with a 114% gain.
Waiting to see the trend manifest itself to sell the other 50%.
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Old 12-29-2011, 12:29 PM   #4
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Just sold the other 50% of my shorts at 26.88 with a modest gain of 69%.
Regardless what happens to my long position, I already realized 162% on my long/short investment, meaning I made a whopping 62% in just 2 weeks on this trade. This could get even better if silver gets above ~ 30 before april.
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Old 01-03-2012, 06:08 PM   #5
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I need to learn more about this myself - At present I don't use options in trading.
I think I need to find some software that looks at the current option prices and builds those charts off them - with real numbers, so I can better assess risk/reward at the current pricing of options at various ITM/OTM points.
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Old 01-04-2012, 08:47 AM   #6
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Originally Posted by DCFusor View Post:
I need to learn more about this myself - At present I don't use options in trading.
I think I need to find some software that looks at the current option prices and builds those charts off them - with real numbers, so I can better assess risk/reward at the current pricing of options at various ITM/OTM points.
A few things I can give as advice:
1. Doing the math correctly is essential. I use a trading plattform that my former employee (a futures fund) also used. It´s very expensive, but a great tool: http://expersoft.ch/expersoft-pm1e-suite.html
I think to start with you can use a free options calculator like this web based one: https://www.cboe.com/LearnCenter/OptionCalculator.aspx
I would do some testing without investing real money first.
2. I don´t use exchange traded (COMEX) options. I customize my own options directly with my bank (a tbtf bank). These options are called over the counter options. There are banks in the US which offer these services, too. Definitely the tbtf like goldman or jpm.
3. The volatility trade cited above needs some patience. I wouldn´t buy short term options. 6 months duration is a reasonable timeframe from my experience.
4. Flexibility is key. Be sure you can close your positions at any time.
5. If you want to read a book on options first, I recommand this one:


I know it´s pretty expensive
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Old 01-04-2012, 09:41 AM   #7
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Thanks, SA! As a computer guy and scientist, expensive books are not a shock to me (I even wrote one). In this case, the "right stuff" is much more important - all the junk books I got cheap at the used bookstore are lame, and bad info could lose me real money, after all...

I'll check out the other stuff too. I've been hankering to use the API over at TDAmeritrade where I trade, which I've got a copy of and support to just write my own doggone platform that does what *I* want, but it's been a question of supporting my other business first, of late. Sigh, hours in the day and all that.
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Old 01-04-2012, 10:08 AM   #8
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Originally Posted by DCFusor View Post:
Thanks, SA! As a computer guy and scientist, expensive books are not a shock to me (I even wrote one). In this case, the "right stuff" is much more important - all the junk books I got cheap at the used bookstore are lame, and bad info could lose me real money, after all...

I'll check out the other stuff too. I've been hankering to use the API over at TDAmeritrade where I trade, which I've got a copy of and support to just write my own doggone platform that does what *I* want, but it's been a question of supporting my other business first, of late. Sigh, hours in the day and all that.
Your professional background will definitely help you learning options quickly. The math will probably be a cakewalk for you anyway.
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Old 03-08-2012, 08:53 AM   #9
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Casey Research posted an interesting article on gold and silver volatility a few days ago:
http://www.caseyresearch.com/article...=ZHB442ED0312A
Quote :
By Jeff Clark, Casey Research
On February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That's quite the fall for one day. We've seen prices that have risen that much, too. But as I'm about to show, these ain't nothin', baby.
Based on our experience, we've been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle – and that once there, the gyrations will jump even higher. This call doesn't exactly require one to go out on a limb; it makes sense since more investors will be crowding in – and volatility was high in the 1979-'80 mania.
First, let's put last Wednesday's big plunge in perspective. Here's a picture of the daily changes in the gold price since 2003, based on London fix prices. (This chart is very busy, but I want to show the bulk of the bull market in one visual.)

A 4.8% decline is one of gold's bigger one-day movements over the past nine-plus years. But as you can see, there have been a number of days where gold rose or fell more than 5%. And it exceeded 6% on five occasions.
Here are the data for silver.

Last Wednesday's decline of 6.2% was one of the metal's bigger one-day movements. However, it's exceeded 10% on 14 occasions, 15% three times, and rose an incredible 20.06% on September 18, 2008.
You might think this kind of volatility is high – and it's true. Worse – or better, depending on how you see things – the volatility in the underlying commodity is magnified in the related company stocks. This is why Doug Casey calls mining stocks, especially the juniors, "the most volatile stocks on earth." But the thing is, metals volatility has been higher in the past, particularly during a mania.
Here's what I mean.
The following chart documents gold's daily price changes from 1976 through the end of 1980. Take a look at the jump in volatility in 1979-'80.

Volatility became the norm in 1979 and especially 1980. Fluctuations of 4% or more were not uncommon.
Here's the same chart for silver. The metal's volatility during the 1979-'80 period became extreme.

Daily price movements of 6% or more didn't occur once prior to 1979 – but then they became commonplace.
...
Continue reading here: http://www.caseyresearch.com/article...=ZHB442ED0312A
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Old 03-08-2012, 09:13 AM   #10
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SA,
When government began the practice of gold leasing and silver and gold were paperized, volatility became the norm because it was now possible to sell unbackerd shares of a commodity that my or may not even be in the posession of the seller. Like SLV and GLD, fractional reserve gold and silver sales are 99 percent of today's market, so if there is sudden demand for the real thing, the sellers of fantasy gold and silver panic.
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Old 04-04-2012, 04:14 PM   #11
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OK. I'll probably open up another volatility trade for silver tomorrow.
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Old 08-04-2012, 03:25 AM   #12
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Bump. Great thread, also had to search for it. Subscribed.

You da man SA.
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Old 12-18-2012, 01:28 PM   #13
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The current raid offers another entry point for a silver volatility trade. I'm not sure whether we go up or down in the near future but I'm sure we aren't going to stay where we are (31.5) for a long time, so I'm going long and short.
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Old 12-18-2012, 01:53 PM   #14
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With our government in a completely untenable position, forced to extend the debt ceiling and go even deeper in to teh giant black hole of national debt, silver and gold can only be held back for so long. Eventually, that rubber band will snap back, and when it does it will be biblical.
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Old 01-17-2013, 04:41 AM   #15
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Hi guys,

Following the series here, I have a feeling that Research in Motion (Blackberry maker), is a potential candidate for that option trade, that exploits volatility.

Why I think so - they are about to release their "make it or breake it" version of OS and phoners - Blackberry X, at Jan 27th (AFAIR). This is "all or nothing" effort for the company. The buzz is high in tech circles, some of the people are enthusiastic (I think the user experience looks great, fantastic for power users, but... the problem is, it is not Android nor iOS ), therefore some other ppl are skeptical...

Either way, there is potential to a significant change in unknown direction, depending how the thing unveils after the launch. Some of you traders might want to look at this closer.

cheers.
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Old 01-30-2013, 09:53 AM   #16
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Sorry bushi for not responding earlier, but you were right RIMM would have been a great volatility trade and probably still is:
http://www.zerohedge.com/news/2013-01-30/rimmberrr-10
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Old 01-31-2013, 04:24 AM   #17
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no worries. I was watching live stream of the event, and now I am pretty certain, that RIM (or rather, Blackberry, as they are known from now on), has no chance of survival.

Like I said, fantastic interface for power users (and power users only), some really nifty tricks with screen sharing while on the chat, having two separate "workspaces" in one phone (one for work, managed by your IT department, the other for your personal stuff - so for example, IT dept can wipe out your "work" partition remotely, when you leave the company or lost the phone, but your personal stuff is not touched ny that - niiice!), etc.. But all in all, I think it feels way too much like playing a catch-up, with some nifty unique features, but that's just that..

Oh, and that CEO of theirs, on the stage - my gosh, it was embarrassing to watch, he is such a fucking disastrous presenter, fuck me... Dead, rotting jellyfish have more spine & XFactor, than he has... Words cannot describe, how hopeless and flat that presentation was delivered. It only changed to better each time, when somebody else was taking over the stage - project managers, developer relations managers, etc. If he couldn't figure out, that he should NEVER, EVER have been presenting that event - how on earth is he supposed to make strategic decisions for the whole fecking company?

I feel sorry for the Canadian fellow tech guys hired by BB, but I am pretty sure they are going down, despite having quite interesting product(s) on their hands.
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Old 04-07-2013, 08:42 AM   #18
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For the paper traders here at pmbug:
If you wanna make a hedged bet on the massive silver rally ahead, you can open a spread trade with a long bias. Buy July calls and July puts with a 2:1 call/put ratio, as described in the op of this thread.

Possible Strikes:
Call 28.5 or 29.
Put 26 or 25.

Such a trade is called a strap:



Note: Make sure you do the math yourselves and be aware of the risks involved in options trading.
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Old 04-16-2013, 10:30 AM   #19
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h/t to ZH for the following chart:

The current crash in gold was out of the value at risk (VaR) range for many models. The percentage change is so far away from regular price drops that it presents a black swan.

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Old 04-16-2013, 10:36 AM   #20
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Like I have said before, it smells like 2008.
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