Silver "Year End Rally"

Silver is as much as an industrial metal as it is a precious metal. Forty percent of silver use goes to industrial consumption. The use of silver in electrical components is due to its conductivity values. Also, with gold trading above $900.00 an ounce we will most likely see jewelers use more silver this holiday season. With the holiday season coming up quite quickly we should be looking for a year end rally.

Demand is usually on the increase for silver, in the upcoming months on speculation of the retail sales for jewelry, industrial components like computers and cameras. With that in mind, the normal rallies for silver are July through September and then again November through February.

With the metals increasing in value due to the inflation rates and price of energies. The outlook for world economy is looking like more countries will be jumping on board of the metal wagon to curb inflation. Also, we have to look at the emerging markets using more oil to suffice there new found wealth. We should see oil and gas rise not only on the over compensation, but also for the heat of the summer and increasing inventories for winter heating.

Technically, we have seen silver touch the 200 day moving average three times in the past 3 months with no such luck of a close below to confirm a reversal in the market. Silver has been trading in a uptrend for a couple years with only one breakout to the upside. The February 2008 breakout was short lived as silver returned to the range in mid March 2008. First support is at 17.00 with second support around the 15.75 - 16.00 level. I am looking for a early year end rally with maybe a pull back into October before we see another rally for November through February.

I actually have two recommendations for silver at this point. First of all, is a bull call spread which limits your risk to the price of the spread purchased. This spread would be to buy the December 1950 call and sell the 2050 call for 21 cents or better. Maximum risk would be at $1050.00 Maximum profit if silver closed above the 2050 at expiration would be $4850.00 not including commissions and fees. That is a 4 3/4 to 1 ratio.

Exit strategy for this recommendation on the down side would be if December silver closed below 16.50 or 40% of the price paid for the spread. Exit strategy for the upside would be at that the underlying contract hits or closes above 1950.

Second recommendation due to the fact that silver has been trading in a range and the economic outlook is so uncertain, would be to sell out of the money options. Selling both puts and calls on either side of the range would be a strangle. Sell the December 2100 call and simultaneously sell the December 1550 put for 84 cents or a credit of $4200.00. By doing this we are taking advantage of the high price of the options and time value. The downside to this trade is that you have unlimited risk with limited profit potential of $4200.00.

Exit strategy for this recommendation is if the underlying contract is to or through the strike price liquidate or when you have collected at least 70% of the premium collected. ($2940)