SLV Stock – Turn A Loser Into A Winner Through Selling Options

Recently I was discussing a SLV Stock (iShares Silver Trust) position with a reader. He had bought SLV Stock some months ago when SLV stock was at $40.00. He apparently did not quite understand covered calls or selling puts and how to implement an options strategy. With SLV stock now down below $32.00 he wrote to me wondering how he could turn his losing trade into a winner.

I had a number of ideas but after reviewing SLV Stock and its history I like the strategy below the best.

This trade involves selling covered calls and selling far out of the money puts in order to generate income, perhaps pick up additional shares of SLV Stock and overall work the value of the stock down into what I refer to as a preferred range.

This is a pretty basic article dealing with working an investor’s stock back into a much better trading range and many readers may find it too basic for them. However the investor who wrote me has very little knowledge of using options. I have made this as basic and straightforward as I can.

The investor did not tell me how many shares of iShares Silver Trust he owns so I will use 500 shares of SLV Stock as an example.

SLV Stock Trade Introduction

The purpose behind this strategy is to get the stock sold at $40.00 down into a lower price range. The reason for doing this is so the stock can be sold for a profit. By having bought at $40.00, the investor purchased the shares at too high a valuation. In order to earn a profit the price of silver would have to rise higher so the investor can sell the stock for a decent profit.

The better way to earn a profit in SLV Stock (or any stock) is to buy it lower and sell it higher. To do that I need to lower the overall cost of the original $40.00 stock. Once I get the stock price down into my preferred range, I can then sell the stock for a decent profit when it pushes back up.

It is important to remember that SLV Stock is not for buy and hold. This is a commodity stock which will fluctuate widely with the price of silver. SLV Stock should be bought and sold and then the buy /sell cycle repeated. SLV Stock is for trading so when it runs up and past your cost basis sell it for profits. Then wait, sell puts back in the preferred range to pick up jmore shares and then sell those shares on a rise again. This type of trading will mean that at various times you will not be holding any shares while you wait for the stock to pull back so you can sell puts once again.

SLV STOCK June To Nov 2011

The past 6 months of SLV Stock has seen some large dips. At it’s most recent high the reader bought shares at $40.00. Since then the stock has fallen 20%. A deep in the money call sold as soon as the stock was purchased would have helped to save this position from a large loss. However starting today (Nov 30 11) I would start selling options.

SLV Stock iShares Silver Trust

SLV Stock from June 2011 to November 2011

Building Confidence In A Stock – SLV Stock

To implement my strategy I have to be confident in the stock. SLV Stock is iShares Silver Trust. Therefore it is never going to disappear. It could easily fall in value but I know that no matter how long it takes I can work to build profits from SLV Stock. Select this SLV Stock link to review iShares Silver Trust performance review.

SLV Stock, iShares Silver Trust is a commodity trade. With the price of Silver being higher since 2007 SLV Stock has moved higher. Silver is always going to be in demand. Therefore there will always be some value in SLV Stock. Presently I think silver could move higher which would push SLV stock back up. But to get my profit picture improved I need to start using options now.

The 5 year SLV Stock chart below shows that $40.00 is the high and $30.00 is definitely a better position but SLV stock can easily fall back to $15 to $20.00.

SLV Stock ishares Silver Trust 2007 to 2011

SLV Stock ishares Silver Trust from 2007 to 2011

SLV STOCK – 2 YEAR CHART

The two year chart below for 2010 to 2011 shows that SLV stock can easily trade in the $20.00 to $30.00 price range. I would prefer to be within the $20.00 to $27.50 range in order to make this trade more profitable. To do this I need to sell covered calls for income against my existing 500 shares of stock at $40.00 which reduces their cost while I wait for the stock to recover. At the same time I need to sell puts in my preferred range of $20.00 to $27.50. If assigned shares in that range it will reduce my overall cost of the SLV stock trade and place me in my preferred range.

SLV Stock - iShares Silver Trust 2010 - 2011
SLV Stock – iShares Silver Trust 2010 – 2011

SLV Stock – The Trades To Reduce My Cost (No Commissions in any amounts)

Today Nov 30 2011 I sell the March 2012 $40.00 covered call for .78 cents.

Here is how this would immediately improve my position.  Original cost of 500 shares X $40 = $20,000.00.  Income earned from March 2012 covered call = 500 shares X .78 = $390.00

$20000.00 less $390.00 = $19,610.00.  My average share price is now $39.22.

SLV Stock – Put Selling To Earn More Income and Possibly Pick Up More Shares

I would sell 5 Put Contracts for January 2012 $25.00 strike for .30 cents. Total income earned $150.00.

If not assigned shares at $25.00 by January 2012 this will have reduced my cost in my present 500 shares to $38.92. ($39.22 – .30 cents (the put) = $38.92.)

If Shares Are Not Assigned Even Better

If SLV Stock stays above $25.00 I will earn the entire $150.00. Then I would again sell puts but still within my preferred trading range and far out of the money. To decide in January what put strikes to sell again, I would look at where the stock is. For example perhaps by January the stock has fallen to $27.50. I would then sell the March or April $20.00 put strike if there was enough put option premium.

If SLV Stock Falls To $25.00 by January 2012

If by January 2012 SLV stock has declined to $25.00 I could buy back my January $25 spy puts and roll them out further in time and lower OR accept the shares.

If SLV Stock Is Assigned at January $25.00

If I accepted shares at $25.00 in January 2012 here is what my position would look like.

Original Amount of capital   $20000.00
Covered Call Income –                  (390.00)
Puts Selling Income –                    (150.00)
500 shares X $25.00 =          $12500.00
Total capital then in trade = $31960.00 / 1000 shares = $31.96.
At this stage I would again sell covered calls at $32.00 going out 4 to 5 months depending on how low the stock is.

I would buy back to close my March $40.00 covered calls and then sell 10 covered calls at $32.00 which is just above my cost basis of $31.96. The whole purpose at this stage is to get my stock price down into my preferred range so I can sell SLV Stock for decent profits from a lower level.

Then Sell More SLV Stock Puts

After being assigned shares at $25.00 I would sell 5 more puts at least $5.00 below the present SLV Stock price at that time. In other words if the stock was at $20.00 I would sell 5 put contracts at $15.00.

By continually selling puts on SLV Stock, if I was assigned I would be reducing my cost basis in the stock to get it down to the preferred range. Eventually I would end up owning the stock within my price range of $20.00 to $27.50.

Covered Calls When My Stock Is In My Preferred Range

Once I get my SLV Stock into my preferred range of $20 to $27.50, I can start selling covered calls above my cost basis. By selling at $2.00 and higher strikes I can generate more capital gains, but once SLV stock moves out of my trading range it is important to remember to stay away from the temptation to sell puts above the preferred range.

You will want to stay within the preferred range to insure that you do not get caught again at too high a level in this stock.

Within the preferred range I could continue to accumulate shares at lower strikes building a position in the stock preparing for when the stock moved back up and to then sell them for a large profit.

If the stock continued to fall I would continue to sell puts at ever lower strikes and continue to accumulate shares, all the while selling covered calls above the cost basis until eventually SLV stock is exercised profitably from me.

SLV Stock Will Never Disappear

Since SLV Stock is iShares Silver Trust it will never disappear. It may certainly fall but it wouldn’t matter as I can comfortably keep selling puts at ever lower strikes and keep building profitable positions within the stock.

SLV Stock Summary Of Article

The trade is in two parts. The first is to lower the original stock from $40.00 to get it into the preferred range. To do this means selling covered calls close to the stock cost price until the trade is finally back into the preferred range. The second part is to sell out of the money covered calls once the investor’s SLV Stock is within the preferred range. At that point, selling out of the money calls will generate good profits as the stock trades up and down within the preferred range. To pick up more shares use put selling out of the money to eventually be assigned shares always remember to never sell puts or pick up stock outside the preferred range.

This is a pretty basic outline of how I would handle this stock. There is a lot more to selling covered calls and selling puts to pick up more shares. If an investor finds the above article somewhat confusing I would strongly urge them to not use real capital but paper trade for quite some time to learn the ins and outs of selling covered calls and puts. When a stock rises for example, you may want to hold off selling covered calls until the stock has stalled a bit and then sell covered calls. The same when selling puts. You may want to wait for the stock to pull back and then stall. That would be a good point to sell puts as you are reducing your risk of assignment.

My website has many articles discussing selling covered calls and puts, but it has taken me over 30 years to accumulate the trading knowledge I have. I still paper trade strategies to learn more.

When trading commodity stocks it is important to realize that they will fluctuate a lot. I believe it is important to use options with commodity stocks because their volatility can keep option premiums high which also offers more protection for when these stocks fall.

I hope this article on SLV Stock helps the reader who wrote me, understand the benefit of using options for profit and protection.

  • Good for you Roger. I read an interesting couple of articles recently where a number of technicians believe silver will move higher next year along with gold. If this banking crisis gets worse in Europe, previous metals may indeed move back up but until then you are still making money and reducing your cost.
    Teddi