So my question is in regards to LEAP options and the buying a LEAP option on Silver ( an ETF that mimics silver almost penny for penny ). Say I buy a LEAP on Silver and it costs me $2.50 for that option , with a Delta of .55 So, if Silver gets to the " normal " ratio of what it is to Gold ( that ratio being 12:1 ) , and let's assume that this happens in a year ( and we bought a 2 year LEAP ), How much could we assume that $2.50 option would be worth ? Right now, the ratio of silver to gold is around a 50:1 ratio . That in essence means that Silver could/should go higher by 3 times of what it is currently trading at. Anyways, just wanted to get fellom BM traders knowledge on the question and I look forward to getting insight. Thanks as always - Michael
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1. The ratio is what it is. Just because you think it should revert does not mean it will happen. SLV trades with penny wide b/a. There is no edge. Markets are efficient. You may be correct that it heads higher but I wouldn't count on a reversion to the ratio you mentioned.
2. It is not a bad time to be buying leaps as the current IV is around 30, which also give it an IV rank of around 30 as well. This means it is currently sitting in the bottom 1/3 of its 52 week IV range at the moment. Not a terrible time to buy options if you believe it is heading higher.
3. Ultimately, your option will follow the stock price $100 for every dollar above your breakeven which currently would be $20 and change.
Based on current IV levels, the probability of it touching $25 within the next year is about 42% (the probability of expiring above that level is 21%). The probability of SLV reaching $30 within some point in the next year is about 22% (the probability of expiring above that $30 level is 11%) .
The following 3 users say Thank You to gfmatt for this post:
Big Mike - Thank you for the Link to the Ortions discussion. I'm going to go ahead and post my question in there. Really appreciate the lead gfmatt - Thank you for your response and insight into the trade. I haven't read much into IV until today, after I saw your post and mentioning of it. Definitely something I may add to my options aresenal . I really appreciate it
Thank you gfmatt . I plan top watch it after Christams lunch with my family. I have TorS open, looking at current month and Feb./April options on very stocks. Thank you again and have a great Christmas - Michael
I am going to 2nd gmatt's recommendation on watching tastytrade. Nothing remotely comes close to them in terms of research that is actionable. Tastytrader's are doers!.
Generally speaking selling options is better than buying them. Especially when the IV rank is high enough.
Buying them is doable when the IV rank is low . TLT for example has an IV rank (implied volatility percentile) of something like 2!
This means its volatility is at the very bottom of a 52 week volatility range. Price also happens to be near its lows too.
Buying options in TLT makes sense as I am buying cheap volatility betting on an increase in volatility & price.
I feel SLV is not as attractive as TLT at the moment. SLV is definitely on my watch list though.
Time-frame is best 45 days or so, generally traders that adopt the style of tastytrade would frown on LEAPS as the time frame is to large to manage. 45 days or so is the sweet spot - if your a net seller of options.
If the price of both Gold and Silver go down, such that they revert to the 12:1 ratio you mention, (assuming your not delta hedged) you would make nothing and lose all your premium as buying a leap/call only makes money if Silver goes up, regardless of what the Silver/Gold Ratio is/becomes.
The following user says Thank You to SMCJB for this post: