I normally don’t hold long term positions but I made a rare exception when I went long silver over a month ago. I wanted to track this trade separately from the standard trading I do since this trade will be a long journey. For those wondering, my standard trading involves two strategies: short term directional trades and neutral trading (selling option premium).
My long silver position involves long and short call option trading on the futures market. I won’t get into the details of option’s trading here since it is too large a topic to cover but I will briefly explain whatever topics I need to, to explain my silver position.
My core strategy involves being long ITM (In-the-Money) far-term calls and short near-term OTM(Out-of-the-money) calls. Being long ITM calls allows me to create a synthetically long position while only costing me a fraction of the amount in maintenance margin. For example, when silver was down around 14.20-14.30 a long call @ the 14.50 strike price with 100 days until expiration only cost about $2,500 per contract. That is a position that is long $70,500 of silver (5,000 ounces) for about $2,500. The downside to be long option’s are that you are exposed to theta decay. Theta decay means long options will lose value over time so it is entirely possible to buy an option and the underlying’s price increases and you still lose money. That is because the price may be increasing, but not fast enough to compensate for the theta decay. For this reason I have a general rule “Never buy options”. But I made an exception to this rule for only 1 scenario, if I sell premium in short term contract to offset the theta decay in the long term contract. That basically means I am collecting theta decay to offset the decay I am paying out, hopefully allowing me to stay in a synthetically long position with little or no theta decay.
Here is my current position, I am long the silver future January 28th calls @ 14.50. I went long back in September when prices had dipped down to around 14.20-14.30 and continue this position. I have been selling 16 delta calls with expiration’s that are closest to 30 DTE (days to expiration) and am currently short the November 27th calls @ 15.75. Doing this allows my position to profit on a price move up to 15.75 while collecting enough theta decay to offset the decay of the long January contracts. I have already collected about $500 in theta decay from the short calls so have reduced the cost-basis of my long calls by about 20%.
My strategy, as I mentioned above, is to sell near-term calls to collect enough theta to offset my far-term long calls. This comes at the cost of capping my upside, so I am trying to keep my short calls at around 16 delta, which means price has a theoretical 16% chance of exceeding the strike price by expiration. That gives my position more than enough breathing room to profit, but in the case that price does test my short call strike price my plan is to roll “up and out”. That means I will roll my short calls out to the next expiration date and up in price, but never do so for a loss. For example, right now I could roll my November calls to December and I could roll them from 15.75 all the way up to 16.25 before I would actually take a loss on the position. My next rule is to “Never take a loss” on my short calls. That means if price increases and tests my short calls strike price then I will roll out to the next expiration to collect more premium, and then roll up to increase my break-even. The worst upside case is that price rises so fast that I have to roll out to the same expiration as my long position. If that were to happen then the longs and the shorts cancel each other out and my upside is completely capped.
The best upside scenario is that price rises but not fast enough to ever test my short calls. That means I will profit from my long calls and fully collect the short premium as well, basically getting a double profit. Of course the worst case downside scenario is price quickly drops below my long call strike price(which is 14.50 February 2019) and I am not able to sell enough near-term premium to offset the loss.
I am willing to keep this position open down to the 13.50 region at which point I would likely close it altogether and move on since my “long-term long” thesis would likely change at that point.
How price action and price patterns are involved
I control my short deltas based on the price action that I am seeing. If a very bullish pattern forms then I am going to move my short calls up and reduce my negative deltas. That gets my position more directional and I will profit more from an upside move. If I see a bearish pattern form then I will move the short calls down and create more short deltas. That will give me a bit of a hedge and I will make more money on a down move on my short calls. This allows me to incorporate price action and pattern analysis to control how directional I want to get. The more negative deltas I create then the less I will make on an upside move and the more downside protection I have, and vice-versa when generating fewer short deltas.
Where my position currently stands
As of this post silver is at 14.82 on the February 2019 contracts, so 30 cents above my long February calls strike price at 14.50. November 2018 silver is sitting at 14.70 and my short November calls strike price is at 15.75. The short calls have 9 delta’s and are out quite a bit further than the 16 deltas I would normally aim for. Being out further reduces the theta I am collecting, but the reason I have them out so far and giving up theta profit is because there is currently a very bullish setup forming in silver so if silver does breakout out I don’t want to cap my upside. As everyone here can see I am using price action and price pattern analysis to adjust my short call positioning. If I were to see a bearish pattern set-up I would likely tighten up my short calls to something between 16-30 delta, that way if price dropped I would collect a lot more premium on my short calls.
Overall what would be the best setup I could see is if price breaks out of it’s current range and up to near 15.75 over the next 20 days. That will allow me to fully collect on my current short November calls and then move my short calls out to December and somewhere in the 16.50-17 range. In the meantime I am staying put with my current setup until price breaks one way or another.
I do all of my analysis and trading commentary on TradingView. I will link to that analysis here and add additional “BabyPips Exclusive” commentary as well. I often-times add notes to my analysis as time goes on so if you want to get the full list of notes please refer to the TradingView link. I sometimes add notes to my trade commentary weeks or months afterwards, so make sure you check the notes section to see what additional comments I may have added over time.