We haven’t looked at silver in a while, so let’s check out the latest ad pitch for Jim Fink’s Velocity Trader — he’s talking up a silver trade that he says you can make for $1 and generate 400%+ returns.
This is the intro:
“I’ve found a way for you to make an absolute fortune in the silver market.
“It’s a simple $1 trade that could help you make 5x your money.
“In the next 90 days.
“A collision of political and economic forces has set off a chain reaction that will cause the price of silver to skyrocket.
“It’s already surged 15% in the past few weeks.
“And as you’ll see in just a moment, the run is just getting started.”
You can always come up with someone who has an optimistic forecast for anything, of course, so Fink makes sure to quote a couple of them — HSBC is expecting a 40% increase in the price of silver this year, and “one mining executive” expects silver to “catapult to $140 an ounce.”
Personally, I own a bit of physical silver and expect its value to keep up with inflation over the long term… but I have no idea where the price will go over the next 6-12 months. Silver is often referred to as the “poor man’s gold” because it also has a long history of use as money, including being part of our circulating currency as recently as the mid-1960s… but it’s much cheaper per ounce, and the price has also been far more volatile (partly because it’s just cheaper, partly because it has had periods of heavy industrial as well as “precious metals” use).
Fink also indicates that you could place this same trade several times a year, and keep profiting if silver keeps rising, so that indicates he’s very likely talking about options trading (or some other time-specific derivatives). What else do we learn about this “$1 Silver Trade?”
Well, first there’s Fink’s bullish prognosis for silver, so we know where he’s coming from — he argues that silver demand is increasing at the same time that demand is falling:
“Global silver supplies have plummeted by a staggering 12.64 million ounces.
“And according to The Silver Institute, a nonprofit association made up of industry insiders, it sparked a massive shortfall….
“But what really triggered the countless hours of due diligence I’ve done on this situation was this quote I found in a recent Bloomberg article…
‘More good news for silver bulls: there’s supply trouble brewing. Output from mines will fall for the first time since 2011, while demand for the metal in uses including industrial products and jewelry is heading for a fourth straight gain, supporting prices, according to CPM Group.’
That wasn’t all that “recent” — the article he’s quoting is from last April, when silver and gold were both in the midst of their most fantastic six-month period in years — gold went up about 25% in the first half of 2016, as you may recall if you were enjoying some nicely leveraged returns in a gold mining stock or two at the time, and silver did what it often does, which is move along with gold but with more vigor, and rose by almost 50% at the peak. Something similar happened to star this year, with gold rising about 8% and silver climbing by 15% in the first two months of the year, but both have come sharply off of those highs in the past three weeks (with recent changes mostly driven by interest rate expectations, it appears).
And Fink indicates that this supply/demand imbalance is similar to early 2011, when silver last took a crazy run — and he compares his trade today to what was available back then:
“… during that same time, there was small $1 trade identical to the one I’d like to send you today that jumped an astounding 642%!
“And it didn’t require perfect timing.
“Because it churned out that massive winner on just 26% of the total price increase…in only 49 days.
“Once you discover how easy it is to make money with this simple trading strategy…you’ll want to do it over and over again.
“And the good news is, you’ll have plenty of opportunities!
“Because the silver production slow-down is expected to continue through 2019.”
So what’s the specific trade being talked up here? More clues:
“… all you have to do to get in on the action is follow two simple sentences of instructions in your online account.
“Best of all, you won’t have to deal with the hassles of moving physical silver bars or coins around like regular investors.
“You won’t have to figure out which risky mining stock is sitting on an untapped motherlode…
“And you most certainly won’t have to come within a country mile of something as complicated as trading futures.”
Fink trots out most of the arguments for silver rising, including the “gold/silver ratio”, which has generally averaged about 15 over long periods of time (but has been nowhere near that for most of the last couple decades), the institutional control of silver futures, and the large demand for bullion coins. Add in the industrial demand for solar panels and various electronics that consumer silver, and the price story becomes obviously bullish.
The risk, of course, is that it was obviously bullish last Summer, too, and silver fell 20% in the second half of last year. These long-term trends that sound impressive don’t seem to provide much in the way of a forecasting punch when you’re talking about prices.
And, of course, the timing is critically important when you’re talking about options — and that is exactly what Fink is selling here, a recommended options trade on silver. Presumably using the most liquid and optional silver ETF, the iShares Silver Trust (SLV).
What specifically is he recommending? Well, he repeatedly makes references to “less than two months” and also indicates that you could make this trade over and over, four times a year, so they should be quite near-term options.
And the leverage is pretty substantial, so unless he’s predicting huge price spikes he’s probably suggesting trades that are a bit “out of the money.” Here are a couple other clues:
“the simple silver trade I’d like to send you will easily multiply a small $500 stake into $2,532….
“silver prices only jump a mere 24% from where they stand today…
“You’ll still have the opportunity turn every $10,000 invested into $50,633 thanks to the unique profit multiplying properties of this simple $1 trade.”
So… what is it that Fink is suggesting?
Well, it sounds an awful lot like the old “silver shots” that were touted by a previous iteration of Velocity Trader, back when a trading service of that name was helmed by Zackary Scheidt seven or eight years ago. And I suspect that Fink is pushing more or less the same thing: Near term call options on silver through the iShares Silver Trust (SLV), though he could be going with slightly more oomph and pushing call options on the Global X Silver Miners ETF (SIL) (the latter is unlikely, since there aren’t many option contracts on SIL that have meaningful open interest or volume that could absorb the impact of a newsletter recommendation).
SLV call options are relatively heavily traded, so we can’t pinpoint any particular trade that Fink might be recommending at this point — though since he’s calling up a lot of data from last Spring in the ad, it might be that he just rolls out this suggestion every few months. If we’re talking about something within the next 2-3 months that’s trading at roughly a dollar and has decent open interest and trading volume and could return 400% on a 24% increase in the silver price, then we can just stick to some general guessing — one possibility is the barely in-the-money June 16 strike for SLV call options, which currently trades at about 95 cents.
How does that work? Well, a call option gives you the right (but not the obligation) to buy the underlying security (in this case, the SLV ETF, which holds physical silver in storage) at a set price (the strike price) anytime prior to the expiration date (in this case, June 16).
The SLV ETF is at $16.50 right now, so you could buy it now and a 24% rise in the price of silver would give you something extremely close to a 24% return — it doesn’t track penny for penny, but if silver rises that much you should see the SLV ETF at about $20.50.
If you buy that particular call option contract, you’d spend 95 cents per share for the right to buy SLV at $16 for roughly two months… so if SLV reaches $20.50 before expiration, your option contract would have the intrinsic value of $4.50 per share. That’s not quite a 400% return, but it’s pretty close (it’s about 370%, before commissions and trading costs and taxes). You could either close the option contract by selling it back into the options market, or you could exercise the option and actually buy the underlying SLV shares for $16 as arranged, either should present roughly the same profit if you’re near the expiration date.
The downside, of course, is that SLV might not be above $16 — that it might fall, either sharply or gradually, over the next two months, for any reason or for no reason at all. If that happens, and SLV is below $16 as you approach the expiration date, your option contract will be essentially worthless and will expire with no value.
The good thing about options is that you can never lose more than you put into buying an option, so you know what you’re risking… but you are very definitively risking all of it, there’s always a very good chance, when you’re speculating on call options, that you will be wrong about the price of the underlying security during whatever time frame you’ve chosen, and you don’t have to be very wrong in order for it to be a 100% loss.
So… is that the kind of trading you’d like to do? I do some speculating on call options myself, but I try to be honest with myself that it’s simply a way to get very leveraged access to speculative ideas that I have… and that this is just a fancy way of saying, “I’m pretty sure the Lions are going to win this game” or “I bet that roulette ball will fall on black”. Certainty, I’m afraid, is always elusive… and just like the house has enough control of the odds and a steadier hand and always wins over time when it comes to casino gambling, the old hands of options trading will tell you that it’s the sellers who tend to make money over time, not the buyers.
Selling options is more of an “income scalping” process, though, and doesn’t provide windfall returns — it’s nowhere near as much of an adrenaline rush as you can get when buying an option and seeing it rise in value by 1,000%, and we probably wouldn’t be trading individual stocks at all if we didn’t have at least a little bit of our portfolio set aside for that search for windfall trading returns. So feel free to go out and do your speculating… just keep in mind that like all other gambling, it’s a game of odds and you’re going to get them wrong a lot of the time. So is Jim Fink.
P.S. I should add my brief “warning” aside here, something I always say about options trading services and newsletters: From what I hear from subscribers, these services are almost always expensive and disappointing, at least for folks who believe they’re really shooting for consistent triple-digit returns with bets on exciting stocks. The math just doesn’t work well for most of these situations — if you have 1,000 subscribers, you can’t get them all into the same trade at the same time unless you stick to extremely liquid securities… and options are almost never that liquid unless you’re dealing with huge index ETFs or megacap stocks.
Even that example I gave had a total open interest of only about 2,000 contracts, which is only a couple hundred thousand dollars, and on any given day it might have trading volume of only 100 contracts. If even 300 subscribers get an alert and jump right in to buy 100 contracts each ($10,000, perhaps a reasonable position size for someone that’s paying $2,000 for a trading service), that’s more options contracts than exist for that particular strike and expiration, and you are likely to overwhelm the market and drive the price way up. Usually there would be institutional money to pop in and take that action from you if you’re dealing with an index, but it means that these services don’t have any real flexibility to recommend more esoteric or interesting smaller investments, which often means that the published trades that the newsletter recommends are inaccessible to most of their readers (because the attention from the newsletter shoots the price up too far once the first couple readers see the alert). That’s not a critique of Velocity Trader specifically, but it’s a common complaint that I hear about all options trading services that have more than a few dozen subscribers.