Silver has bounced after falling over $1.50 in two days in mid December. This bounce has fooled many traders to conclude that we are back to the races. This market has just today rallied back above $13.25 and has done a classic head fake move. Look for silver to begin to pull back later this week and by mid next week we will see this market trading back in the 12.50 range. This put spread positions us to take advantage of this head fake and initiate a short position.
We get a small dollar risk coupled with a great risk to reward ratio and a very wide range in which we can profit. This trade is profitable at expiration with silver trading anywhere between 12.08 and 12.92. That is a huge range in which we can profit and for that to happen all we need is for silver to fail to follow through to the upside in the near term.
click on the chart to enlarge
Buy one March 2007 Silver 13.00 put and at the same time sell two March 2007 Silver 12.50 puts, and buy one March 2007 Silver 12.00 put for a combined cost and risk of 8 cents ($400) or less to open a position.
Max profit, assuming a 8 cent t fill, is 42 cents ($2100) and occurs with Silver trading at $12.50 at expiration. Break even points are $12.08 and $12.92 which means we have a band of 84 cents in which the trade can be profitable.
Max risk, before commissions and fees, and assuming a 8 cents fill, is $400. This occurs at expiration with Silver trading below $12.00 or above $13.00.
Odom & Frey
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