Coming Silver Collapse-Best Way to Play? Straddle Trade or Bear Leveraged ETF?

[SQUEXX]

Here is an article from Clive Maund, a very good technical chartist In a nutshell, he says silver is going to collapse like it did in 2008. At the end of the article, he says: "silver is one of the great straddle trades of all time here." I understand what a straddle play is, basically, it's buying a call option and a put option at the same strike price and expiration month. Now my question is, can someone give me an example how they would play it? And wouldn't going long on something like the ProShares 2x Silver ETF ZSL be better in the short run, say the next 2 months or so? Say, into mid-October give or take?

MARKETWATCH - the CRASH draws closer...
August 24th, 2010

http://clivemaund.com

The news today of the record 27% plunge in existing home sales in July in the US hit the markets like a ton of bricks. These figures were far worse than the worst estimates, and thus, while it may be claimed that "the bad news is out", it is clear that this is not news that was discounted in advance and further it has clear bearish implications. This may therefore be "the straw that breaks the camels back" that, perhaps together with further bad news to come, breaks the market down from the Head-and-Shoulders top visible on our 3-year chart for the S&P500 index that has been forming this year. The market is clearly at a dangerous juncture here and failure of the crucial support and the neckline of the H&S top shown on our chart would be expected to lead to a severe decline or even a crash, which we have been anticipating for a long time now. Here is some more grim news from Dr Housing Bubble in California.
http://www.clivemaund.com/charts/spx3year240810.gif

What would be the effect of a breakdown in the broad market on the Precious Metals sector? It would probably lead to a rerun of 2008, meaning dollar and Treasuries up and just about everything else down. Although superficially looking good, gold has marked out what may be the Right Shoulder of a Head-and-Shoulders top. While still in position to break out upside, silver is looking extremely vulnerable here - if the broad market does break down soon silver could plunge precipitously.
http://www.clivemaund.com/charts/silver3year240810.gif

While it looks to us like silver is set up to plunge, we cannot rule out an upside breakout. However, there is one thing we can be about 99% certain of, and that is for those traders who are able to implement such a strategy, silver is one of the great straddle trades of all time here. It has done nothing price wise for nearly a year, and has been fluctuating in an ever narrower for months, so that price and moving averages are tightly bunched and its Bollinger Bands are extremely narrow. All this means that a big move is very probably imminent.

[Saul Mine]

While it looks to us like silver is set up to plunge, we cannot rule out an upside breakout. However, there is one thing we can be about 99% certain of, and that is for those traders who are able to implement such a strategy, silver is one of the great straddle trades of all time here. It has done nothing price wise for nearly a year, and has been fluctuating in an ever narrower for months, so that price and moving averages are tightly bunched and its Bollinger Bands are extremely narrow. All this means that a big move is very probably imminent.

Gonna go either up or down! I dunno, people have been predicting that for two years now, and they have all been wrong: nobody predicted a flat market!

[Neuro]

silver at this time may be one of the worst straddle plays of all time, right now, if the paper fraud market is breaking now, which it might do at any time.

Personally I can't see how you can go wrong with holding plenty of physical at this time!

[Phoenix]

Silver is neither going to crash nor skyrocket.

When the smoke clears, silver will still be worth a lot more than paper.

[Ragnarok]

I think CM is referring to "paper" silver. JMHO, if (paper contract) silver crashes, it will ne because the contracts cannot or will not be settled for actual metal. Trades of any kind in "virtual" silver would become worth less, while the spot price for solid Ag on Reality Street soars in an attempt to make up the difference.

2c, R.

[SQUEXX]

silver at this time may be one of the worst straddle plays of all time, right now, if the paper fraud market is breaking now, which it might do at any time.

Personally I can't see how you can go wrong with holding plenty of physical at this time!


I have plenty of silver, I don't want to buy anymore if the price is going to drop. I'm more interested in getting some bang for my buck going into the crash. I'm holding FAZ, SMN and TWM. If silver does crash like he says, ZSL will be a good ETF to get into. I'm trying to figure out what he said about the straddle play and if would be a better move.

[Neuro]

Squexx not necessarily, you paperplays are dependent on your counterparties ability to pay. Specifically in a market turmoil situation, many if not all your counterparties will not be able to pay, and thus you will get nothing from your 'win'... But it is good you have plenty of physical, it may even go up when/if the papermarket goes down...

[Gknowmx]

Squexx not necessarily, you paperplays are dependent on your counterparties ability to pay. Specifically in a market turmoil situation, many if not all your counterparties will not be able to pay, and thus you will get nothing from your 'win'... But it is good you have plenty of physical, it may even go up when/if the papermarket goes down...


You and R make excellent points. A lot of "winners" will become instant "losers" when the counterparty can't pay. I chuckle at all the new Black Swan funds that are starting up now-- the black swan that will get all of them is the failure of the system to be able to settle transactions due to counterparty failures. Even Taleb is buying physical commodities like Olive orchards instead of the futures.

[Saul Mine]

Generally speaking, that is the fallacy of following public personalities instead of your own counsel. Even an analyst who is pretty good most of the time has to publish something on a deadline, whether there is any news or not, whether he knows anything or not, and it has to sound good whether it's coherent or not. So they all do the same thing: they speak in cliches. If you don't know what they cliche means, or if it has multiple meanings and you act on the wrong one, it is your failure, not his. Your only defense is not to put any importance on what anybody says until you have checked it yourself and reached your own conclusion.

[SQUEXX]

MARKETWATCH - SILVER - did it break out yesterday?...
August 26th, 2010

http://clivemaund.com

On our 6-month chart it certainly looks like it. Yesterday's sharp rise saw silver break out of the Triangle that it has been stuck in since May, according to our normal method of drawing trendlines, which is across closing prices. If we are generous and draw an upper boundary of the Triangle across the daily highs, then the last hope for bears is that silver can close back below this upper trendline and then go into sharp reverse - but this may be clutching at straws.
http://www.clivemaund.com/charts/silver6month260810.gif

Now while it is clear that silver has a way to go before it breaks into the clear by rising to new highs above $21, the action of the past 2 days, which involved a sharp rise and the Triangle breakout after a period of unusual quiet, makes it very probable that a major advance is just getting started, especially when one considers the potent alignment of price and moving averages (which was also potent for the downside just a couple of days ago). What is meant by a major advance? - long-term charts show that after a prolonged standoff of the type we have just seen lasting for nearly a year that a rapid ascent to the high $20's is quite possible.
http://www.clivemaund.com/charts/silver3year260810.gif

While it is obviously galling to have missed out on the sharp rise of the past couple of days, and even more so to have been short, for as you won't need reminding we had thought that it could break down, a key point to keep in mind is that if this breakout is the real thing, then the nascent uptrend in silver is very much in its infancy - in fact its birthday was yesterday, so there is almost everything to go for here on the upside - even after yesterday's sharp rise, silver is still below its June highs in the earlier part of the Triangle. In fairness to ourselves we had admitted we didn't know which way it would break and urged experienced traders to take out a Straddle position (a combination of Calls and Puts), and yesterday Call options in silver and silver related investments soared.

What to do now? Well, after yesterday's fairly decisive action, it is time to go ahead and buy the better silvers, and stops can be placed not far below to limit loss in the (unlikely) event that yesterday's breakout was false. Many silver stocks haven't moved much yet and so there is almost everything to go for. When the point to place stops is not clear on the individual charts of stocks, then the lower boundary of the Triangle in silver itself may be used as a get out point. With this proviso you can go ahead and buy the better silvers and if a powerful rally develops soon, you won't be obliged to do anything but sit and watch for a good many weeks. Those holding ZSL, the Proshares Ultrashort Silver have a variety of courses of action, which include keeping them as insurance for new long positions in silver stocks, taking an immediate loss and switching into AGQ, Proshares Ultra Silver - this tactic has whipsaw risk. And there are a variety of other approaches involving options in both. An important point to note is that as Call premiums in silver and silver related investments soared yesterday, any reaction in silver near-term will likely result in these premiums being slashed which will be the point to pounce on options.

What about the implications of this move in silver for gold and the broad stockmarket? Starting with gold, it suggests that the potential Head-and-Shoulders top in gold that we had observed is about to abort - this will be verified by gold closing above the Left Shoulder high, i.e. above $1250. If this happens then we can reasonably expect gold to break out to new highs and romp ahead as silver continues to advance steeply. PM stocks indices such as the HUI should break out to new highs and also advance strongly.

Of course none of the above is likely to happen in the event that the broad stockmarket caves in, so the message being telegraphed by silver yesterday is that this is now off the table, at least for the time being. What does this mean? - it means that the Fed and the Treasury and the US government, backed into a corner as they are by crushing unservicable debts are going to continue to play the only cards they have left, which is zero interest rates and money creation. This is what yesterday's move in silver is signalling. Will this prevent the stockmarket from eventually caving in? - probably not, but it is intended to buy time. The US economy is in a truly parlous state, with weak domestic demand due to the now very high unemployment, which is exacerbating the collapse in the housing market, the manufacturing base outsourced to other countries, and is burdened by massive unservicable debts that require zero interest rates and rollovers to stave off default. In this most unproductive of environments, all they can hope to achieve with their Quantitative Easing (money creation) and monetization of Treasuries etc is to keep things limping along to buy themselves some more time. The poor old average Joe out on the street will end up picking up the tab of course through a collapse in the currency leading to ramped up inflation. This is why gold and silver now look set to rise. This amazing graphic reveals the startling deterioration in the US economy in just 2 years, and remember this is based on "official" statistics - the real world figures are actually much worse.

[SQUEXX]

Good advice, Sal.