Heavy Metal Party Pooper

Unless you’ve lived in a cave you are aware that precious metals have enjoyed a merciless run over the past year. It’s been one long coke snorting, alcohol guzzling, panty snapping party binge. If you traded it up you are smiling all the way to the bank.

But unfortunately it’s just about to end. Sorry guys, I really hate to be Doctor Buzzkill…
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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I present to you exhibit A, which is quite a stunning chart. As you can see the gold:silver ratio (in blue) has plunged from 68 to 43 in less than a year. The last time we saw readings like that was in 1999 – just before it dropped like a rock. Since then we saw several massive drops in the ratio – some of which I pointed out via blue arrows. What always followed was a long alchemical transformation that reduced silver’s price by at least 30%.

And here is exhibit B – the futures with my favorite BB combo. As you can see even precious metals have obeyed the power of my magic lines in the past. However, when it comes to BB breaches this latest one stands on its own – wow, what a spike. And overnight/today SI pushed to 33.87 – which is exactly where?

That’s right – the 2.5 standard deviation – and I mean SPOT ON to the fraction. Coincidence? I think not.

So, I know what I am going to do – yes it’s possible that silver pushes to the 2.0 Std Dev – and I don’t mean to be cynical here. Commodities do not trade like equities folks, and it’s always possible that we’ll get an extension in what I think is a blow off top. But I think it’s fair to start taking small short positions right here and now. Okay, having said that this is how I’m going to play this:

OPTIONS on either SI, ZI, or SLV. Why?

Look, I expect a big drop but it may come tomorrow, a week from now, a month from now – who knows? I mean – there were great shorting opportunities before but many did not last very long and you had to be nimble to keep our coin. But with VIX trading around 16 and considering the charts above it’s not unreasonable to expect more than the obligatory piggy shake out. It’s indeed possible that we’ll see a fast and nasty drop that keeps on giving. And if that holds true then we won’t need to take on much risk to take advantage of this setup. Just buy a handful of OTM puts and expect them to expire worthless. You may have to do this a few times potentially but when this thing gives it’ll really rock your world.

Here’s something else I find interesting. That’s SLV’s comparison of implied volatility and I see very interesting divergences in the March and April options. However, the most fascinating divergences are in the February weeklies which expire in four days. For whatever reason the IV below the current strike is higher on the put side – and perhaps those market makers are getting a bit nervous about writing short term puts right now.

Anyway, I think it’s a decent setup. Of course if you take it you will lose all your money and your wife will make you sleep on the sofa – again.

Cheers,

Mole