Barron’s editor Steven M. Sears explains a popular options strategy some traders are using to play silver, on the hopes that it continues to ride gold’s coattails higher.
The primary proxy for silver is the iShares Silver Trust (ticker: SLV), which is trading at a modest $17, compared to $102 for the SPDR Gold Shares (GLD).
To benefit from a silver rally, traders are buying in-the-money January 17 calls as surrogates for the exchange-traded fund. An advantage of buying calls that are in-the-money — that occurs when the stock price exceeds the strike price — is that the calls move in lockstep with the stock. For $1.55 to $1.60, which is the price of the January 17 calls, traders are controlling a $17 exchange-traded fund, and using leverage to multiply their returns.