The current stock market has become so uncertain. Yet, I am always looking around for opportunity, wherever it might lie. And in the case of this trade idea, I should say it lies like a sleeping dog does.
Because once again, it is time to present what I call “the Dog Collar.” That’s a regular, plain old option collar, where I buy a put option around or below the current price of a stock or ETF, and write a covered call to offset part of the cost.
The “dog” part of the name comes from my penchant for applying option collars to securities I find to be technically risky but potentially close to making the turn higher. These are high-risk, high-return situations.
However, using an option collar cuts the risk substantially. And if the ETF or stock zooms higher in price, I have the option (pun not intended) of buying more of the underlying stock, buying call options for more “juice” on the upside, or both.
So to me, with the tech sector wreckage of Q1 and industry-specific issues plaguing other corners of the market, I came upon an interesting option trade.
It is silver (SIK26), and the iShares Silver Trust ETF (SLV).
The good news for SLV holders: it has doubled since last September. The bad news: it is off 40% since late January of this year. That creates a daily chart that looks like this.
And an option collar that looks like this.
The ETF closed Wednesday at $65.21, and the collar goes out to the end of Q3, so about 6 months from now. With strike prices at $64 for the put and $77 for the call, that’s a modest out of pocket cost for such a volatile asset. Only 3.5%, which creates a maximum downside risk of 5%. The upside over that half-a-year time frame is 15%. So a clean 3:1 up/down ratio. The display above shows the inverse, 0.33 to 1.
That’s a solid collar which allows me to “take a shot” here. I think the current environment will uncover more “dog collar” plays. SLV was the first one that caught my eye since it has already shown us it can morph from a plain old member of the commodity sector to a meme-like party animal.
SLV’s dramatic transition from a parabolic runner to a struggling asset is what makes the collar strategy so relevant for SLV right now.
A collar is essentially a way to manufacture stability when the floor feels like it is falling out. By owning the underlying SLV shares while simultaneously buying a protective put and selling a covered call, you create a defined range for your investment. The premium collected from selling the ceiling (the call) helps pay for the floor (the put), allowing you to stay in the trade without being decimated by the current 3% daily swings.
Admittedly, I have written about a lot of dog collars recently. And for good reason. When the stock market does what it did for months (nothing!), the opportunities do not “bark” very loudly. But this one is. And I think there will be plenty more where this came from. Stay tuned, and refresh your basic understanding of Barchart’s robust option statistics and trade-creation resources.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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