Make Kitco Your Homepage

Silver/Natural Gas: Winter is coming

Commentaries & Views

It was a roller coaster ride of a week in the markets. With the Fed in the middle innings of a rising global interest rate cycle, traders remain on edge, frantically chasing every bear market bounce while, conversely, burying their heads in the sand with each sell-off. Trading in such conditions can become problematic because the volatility can lead to significant changes in the trading ranges. For example, on Monday, we saw cooling ISM data (50.9 vs. 52.5 exp.) triggering a 737-point rally in the Dow Jones, followed by the Reserve Bank of Australia on Tuesday disappointing with a 25 bps rate hike when 50 bps was expected, adding another 791 points to the bear market bounce. On Friday, we saw a complete reversal with the headline Nonfarm payroll number coming in line with expectations, nearly cementing another 75 bps at the November meeting.

Silver and Natural Gas are two markets our team has flagged as having the potential for a sharp short-covering rally once the sell-off is complete. Silver which remains a heavily shorted market, could ignite with speculation of a Fed "dovish" pivot. At the same time, Natural Gas maintains multiple factors, such as the possibility of an unseasonably cold winter or a supply disruption that could lead to a rally.

We have found that trading accounts with limited capital or those with a risk-averse posture consider calculated options strategies to gain exposure in the markets by limiting downside risk and maintaining a position in the market. If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading "real assets," such as the 1000 oz Silver futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

Example of a Bull Call Options Spread

An options bull call spread is a trading strategy aiming to capitalize on an increase in a given market or asset during times of high volatility or counter-trend trades. The option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap your max loss if the price of an asset drops. However, the design also limits the potential gains in case of a price increase. Bullish investors often use this when trading futures as a calculated risk debit spread.

Daily Silver Chart

An example Strategy in Silver

We use the January 2023 Silver futures contract in this bull call spread example. We are buying January 1 Silver $21.00 call at $1.25 as our long call. We then simultaneously sell January 1 Silver $22.00 call at $1.00 as our short call. This action creates our premium, which is 25 cents. We then multiply that by $50 to account for Silver's multiplier (a 5,000-ounce contract) to get $1,250, or our total premium paid (plus any commissions or clearing fees).

We can calculate our potential max profit simply by taking the difference in our strike prices ($22.00 - $21.00), which is $1.00, then multiply $1.00 by 5000 because this is a futures contract. That gives us a total of $5,000 as our max gross profit, minus our $1,250 premium, leaving us with a max net profit of $3,750 (less any commissions or clearing fees).

Daily Natural Gas Chart

An example strategy in Natural Gas

Using a similar strategy with February Natural Gas, we recommend buying February 1 Natural Gas $7.00 call at $1.70 as our long call. We then simultaneously sell February 1 Natural Gas $7.50 call at $1.57 as our short call. This action creates our premium, which is 13 cents. We then multiply that by $10,000 to account for the natural gas multiplier (a 10,000-MM BTU contract) to get $1,300, or our total premium paid (plus any commissions or clearing fees).

We can calculate our potential max profit simply by taking the difference in our strike prices ($7.50 - $7.00), which is 50 cents, then multiply $0.50 by 10,000 because this is a futures contract. That gives us a total of $5,000 as our max gross profit, minus our $1,300 premium, leaving us with a max net profit of $3,700 (less any commissions or clearing fees).

These two examples are ways that an individual can gain exposure to the futures and commodities markets with limited risk looking for a year-end rally. Traders may exit the positions before expiration resulting in less than the fully expected gains due to the time remaining on the strategy. To further help you develop a trading plan, I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold that can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.