Tuesday , 18 June 2024

“Rent” Silver For Pennies-on-the-Dollar! Here’s How

Investors owning a substantial amount of physical silver are not only paying storage costs, they are missing out on interest to be made in this higher-rate environment. Investors are losing both money and opportunity but:

  • what if there was a way to keep upside exposure to silver without the costs of storing and insuring it?
  • What if you could also earn interest on the side – even in a “worst case” scenario?

…This report shows you how it’s possible to “rent” silver for pennies on the dollar, freeing up capital to earn virtually risk-free interest elsewhere.

Use COMEX Call Options to “Rent” Silver for Pennies-on-the Dollar

  • Buyers of silver call options pay money, known as a “premium,” for the right but not the obligation to be long silver futures at a specific price for a specific period of time. Call option buyers are not buying the market; they are merely buying the right to be long that market. When you buy a call option, you are essentially “leasing” the right to profit from higher silver prices.
    • The key phrase is “but not the obligation.” Should silver decline or fail to rally before the option expires, the option buyer will simply not exercise the right to buy the futures contract. All the silver option buyer risks is the premium paid for the silver call option (plus any transaction costs).
  • Silver call option sellers receive money in exchange for the obligation to sell silver futures for a specific price for a certain timeframe. Notice how this definition is the exact opposite of call option buyers.
    • Think of it this way: if you are an employer, you pay money to your employees. This gives you the right to tell them what to do. As an employee, you receive money from your employer, obligating you to do what your employer tells you. Options work the same way.

The Silver Part of the Strategy

…As we write this, July 2020 silver futures are trading at $16.00 per [troy] ounce. That makes each 5,000 [troy] ounce futures contract worth $80,000 (each option covers 5,000 [troy] ounces of silver, making each 1 dollar move worth $5,000 and each 1-cent move worth $50). Our upside target on silver is somewhere north of $21.00 per ounce. What we want to do is buy a July 2020 $18.00 call option and simultaneously sell a July 2020 $21.00 call.

The “bull call spread” described below pairs the right to buy silver at $18 per [troy] ounce with the obligation to sell silver at $21.

  • As of the close on March 12, 2019 the July 2020 $18.00 silver calls we want to buy cost $3,600.
  • The $21.00 silver calls we want to sell cost $1,750.
  • Buying the $18.00 call while simultaneously selling the $21.00 call makes our net cost $3,600 minus $1,750 or $1,850.
  • This (plus transaction costs) is the most we can lose on this trade if silver fails to rally past $18.00 prior to the expiration of the July COMEX silver options on June 25, 2020.

Let’s say silver rallies to or above our target. We could exercise our right to be long at $18.00 per ounce. Since we have a corresponding obligation to sell silver at $21.00 per ounce, the most our spread would be worth is the difference of $3.00 per ounce. $3.00 times the 5,000 ounce contract size is $15,000. Not bad for a $1,850 risk…We can now take the $80,000 we didn’t spend on physical silver and invest it in a safe, interest-bearing investment like a CD. 

The CD Part of the Strategy

As we write this, the best rate for an 18-month CD on Bankrate.com is 2.92%.  18 months of interest at 2.92% on $80,000 is roughly $3,540. By pairing this CD with the bull call spread above, you’ve essentially created your own silver-backed CD.

  • It’s like earning interest on your silver [and] you’ve also lowered your total risk.
    • Subtract the $1,850 cost of the trade (assuming silver does not rise above $18.00 per [troy] ounce) from $3,540.00 in interest from your CD and the worst you can do is collect $1,690 in remaining interest.

Compare the above with purchasing silver outright.

  • Not only…[do] you have to pay markups on your initial purchase, but you also have to pay monthly storage costs.
  • Worse still, you forfeit the interest you could have made in is safe investment like a CD…

Prices for this strategy will have changed by the time you read this, but you should be able to construct a similar strategy…Please be advised,[however,] that you need a futures account to trade the markets in this post.

(The RMB Group has been helping its clientele trade futures and options since 1991 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account or visit our website at www.rmbgroup.com.)
Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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