Today I sold my Silver put option that I bought for 0,54 USD/oz on April 21 2011. I sold it for 3,62 USD/oz, or a profit of 567% on my invested capital. I have decided to take profit because silver post-top corrections after parabolic moves have been on average 30% (please refer to the image below). So far, silver has declined 30%, so I believe silver might correct and go up before going down hard again. I believe the direction of silver will be down because broken parabolas don’t recover fast if they ever do. I believe silver will recover and even exceed the 50 USD/oz high, but that will take long time.
Post-top corrections of silver

The silver put option was a position in my trading account. A speculative play that I make with less than 10% of my total trading account size. I use put options when I detect a parabolic rise of an asset. The options limit the possible loss if I’m wrong, but they also offer me opportunity to leverage my trade. I always buy out-of-the money options, so I pay cheap premium for the option. As after parabolic rise, I do expect huge correction, I prefer to buy cheap out-of-the options and risk less capital for a high return, if I’m right. I also buy the options for a short period of time. Usually I buy options for few months, so they are cheap. In this case my option was bought until August 1 2011.

Summary: Silver put option bought on April 21 2011, for 0,54 USD/oz, with silver price strike 35 USD/oz, and expiration date August 1 2011. The silver option was sold on May 5 2011, for 3,62 USD/oz or a 567% ROIC.

Today, April 21 2011, I bought silver put option at 0,5438 USD/oz with a strike 35 USD/oz and expiration date August 1 2011. The put option on silver is for 0.87% of my trading account. The rationale behind this trade is the parabolic move that I detected. To be honest, I’m extremely optimistic that silver will rise long-term and I plan to buy more of silver when it corrects. No, we must face reality. Silver has risen in a super parabolic move due to speculation and shortage and retail traders bought it aggressively . Silver has risen between 2002 and 2011 – from 5 USD to 45 USD/oz or 900% for 9 years. I believe that silver will crash soon. We have a huge standard deviation parabolic event, which could correct at least 30%. When I detect a parabolic move, no matter what the asset is, I usually risk a small amount of my trading account to buy put options while try to be as precise with the timing as possible.

Parabolic moves always end badly. They form because super high optimism about an asset, many factors supporting it, and it goes much higher than 200 DMA. There is also another red flag that might help destroy the parabola and it’s “margin hikes”. Silver has risen between April 2010 and April 2011 – almost 160%. This is not sustainable rise and points to extreme speculation. We will get another opportunity to buy physical silver, but at much lower prices. (more…)