Clive Maund
gold, silver, & oil shares


ETF and OPTION PLAYS for a PM SECTOR PLUNGE...

originally published October 7th, 2012

The reasons why gold and silver are now vulnerable to a sudden and severe correction have been set out at length in this weekend’s Gold and Silver Market updates, and we are not going to waste time and space repeating them here.

The purpose of this article is to present vehicles that may be used by subscribers to capitalize on such a sharp drop, by means of either shorting them in the case of bull ETFs, going long if they are bear ETFs, and leveraging gains by employing leveraged ETFs, with the possibility of leveraging gains still further by the use of options.

We don’t bother much with straight 1 for 1 ETFs because we are usually out to catch bigger fish, and if our judgement is correct we might as well make more out of the situation by going for 2X ETFs and sometimes 3X ETFs.

We are going to start by looking at the 1 for 1 ETF, SPDR Gold Trust, mainly because it carries a wide range of highly liquid options with very narrow spreads.

SPDR Gold Trust GLD, $172.62

This is a close proxy for gold itself, and the same technical considerations and interpretations thus apply to it. On its 6-month chart we can see that the price is closing up within a bearish looking Rising Wedge, just like gold. It may be shorted here with a closing stop at $174.20. This stop will get us out for a minor loss if wrong. It is a good candidate for Puts with strikes between $166 and $171, either Oct or Nov expiry, which are only recommended for subscribers with the appropriate level of experience and understanding. The Octobers are cheap but expire in a few weeks, but a few weeks will probably be long enough. The Oct 171’s at $1.18 are an attractive play, as are the Nov 169’s at $1.97 which have more time to expiry. If the trade moves against us it is thought better to stick with the options as an upside breakout may be a false move, and if you get it wrong with options you quickly make a big loss, so there is not much point in bailing out. This same logic applies to all the options mentioned in this report.


The 2-year chart for GLD shows that it has arrived at a good point for it to go into reverse, as it has reached a zone of strong resistance approaching two earlier important peaks where it turned down substantially in the past.


If things go the way we expect them too, the profit potential of silver related investments will, as usual, be considerably greater than that of gold related investments, so now we move on to the big silver ETF, iShares Silver Trust, which like GLD, has a broad range of highly liquid options with narrow spreads.

iShares Silver Trust SLV $33.45

This is a close proxy for silver itself, and the same technical considerations and interpretations thus apply to it. On its 6-month chart we can see the small Double Top that has formed beneath the resistance level shown. It may be shorted here with a closing stop at $34.30. This stop will get us out for a minor loss if wrong. It is a good candidate for Puts with an optimum strike at $32 or close, either Oct or Nov expiry. The October 31’s at only $0.10 are regarded as a very attractive play as, as although they are quite far out of the money, and thus have less chance of performing, they are extremely cheap, being 20% of the price of the Oct 33’s at $0.50. As we can on the chart SLV could easily plunge through the 31 strike and if it does these Puts will hit, big time. The November 31.50’s at $0.50 are also an attractive play with more time to expiry.


The 2-year chart for SLV shows that it has arrived at a good point for it to go into reverse, as it has reached a zone of strong resistance approaching two earlier important peaks where it turned down substantially in the past.


A leveraged silver bear ETF that we have used to great advantage on several occasions in the past is ProShares Ultrashort Silver.

ProShares Ultrashort Silver ZSL, $40.11

Not surprisingly ZSL has taken a beating in recent months as a result of silver’s breakout and strong advance, but now, as we can see on its 6-month chart, a potential base area is forming that mirrors the potential top in silver. This ETF has a habit of spiking dramatically when silver plunges and can be a highly rewarding play. Support is close by and clearly defined, so there are two ways to play this – either go long with a closing stop at $38.40, which will get you out for a relatively minor loss if the trade doesn’t work out. This is thus a trade with a highly favorable risk/reward ratio because if silver does break down and plunge, ZSL will soar. If you want to play the higher stakes game, go for the Calls with a strike between $41 and $45, October or November expiries, which are considered a worthwhile gambit as although they have considerably wider spreads than say SLV, they go ballistic when ZSL spikes. The Oct $41 Calls are at a good price at $1.25 ask, the higher strikes are considered rather pricey given how far out of the money they are, although they still offer more leverage of course. The Nov 42’s, which have the luxury of much more time to expiry are also well priced at $2.05.


The last two trades below are recommended only for hardcore gamblers, as they are 3X bear ETF’s that “take no prisoners”. You have got to get it right with these. Fortunately on this occasion, we can limit damage if the situation goes against us by setting stops beneath clearly defined support.

Direxion Gold Miners Bear 3X ETF DUST on NYSE, $23.53

The reason for going for this is that it could rack up big gains fast if the sector plunges soon, however, risk is correspondingly high. On its 6-month chart we can see that the price is close to key support at and above $22, although support doesn’t count for much with highly leveraged ETFs. It may be bought here, but with a general stop at $21.80, which is just below the September intraday low at $22.00. Note that this is not a closing stop in this case, because if gold did succeed in breaking out upside DUST would plunge again, and we don’t want to stick around if that happens.


VelocityShares 3X Inverse Silver ETN DSLV, $21.43

Added to this article towards lunchtime on 9th October this is a late, but not too late, addition to our fleet of PM sector bear ETFs, which is only suitable for experienced speculators as it is highly leveraged. This should really get moving once silver breaks down below important support at about the $33.50 level, which it is currently not far above.

On its 6-month chart we can see that the price of DSLV got chopped in half by the recent steep advance in the silver price. Over the past several weeks, immediately following this decline, it has been marking out a potential base pattern, and the huge expansion in volume of recent days is thought to mark the start of a breakout drive that will blast the price out above nearby resistance as silver breaks down and plunges. If this eventuates then it should quickly soar towards the higher resistance level shown where profits should swiftly be taken. Such a move will result in large percentage gains from the current price, and are made possible by the high leverage of this ETF.


Like DUST, this 3X ETF is not for the faint of heart – it is another one of those that “takes no prisoners”. If you get it wrong with this you will quickly find yourself in trouble. Fortunately we can define and limit risk by placing a stop just beneath the support shown at the bottom of the potential base pattern. While the triggering of this stop would result in a significant loss for buyers entering here, it is acceptable given the potential payoff if the trade works out.

Please note that this article will be filed under Exchange Traded Funds in the Archive.


All prices are for the close of trading on Friday 5th October, with the exception of DSLV, whose price is that at about noon on 9th October.