How to short silver

When the music stops, silver prices, which are more volatile than gold, could take a drubbing. Here’s how to profit off a rapid fall in silver prices.

There’s a party right now in precious metals. Over the past 12 months, silver prices have clocked gains of more than 150 percent. When the music stops, silver prices, which are traditionally more volatile than gold, could take a drubbing. Here are some ways to make money shorting silver should investor sentiment sour on the “devil’s metal”:

1) Inverse ETNs. The simplest way to bet against silver prices is by investing in a short silver ETF. ProShares UltraShort Silver ETF (NYSE:ZSL) uses financial instruments in an attempt to return 2X the inverse of silver spot prices. If silver prices fall 1 percent, ZSL should rise 2 percent. Conversely, if silver prices rise 1 percent, ZSL should drop 2 percent. Shares in the UltraShort Silver ETF trade on the NYSE just like shares in an actual company.

2) Short the long ETFs. Don’t like being limited to a single inverse ETF? You could also profit from a silver sell-off by shorting shares in a long silver ETF. iShares Silver Trust ETF (NYSE:SLV) is hands down the most popular long silver ETF with nearly 30 million shares trading hands every day. Other popular silver ETFs include the SPDR S&P Metals and Mining (ETF) (NYSE:XME), which invests in silver mining shares, and the leveraged ProShares Ultra Silver (ETF) (NYSE:AGQ), which attempts to return 2X the spot price of silver.

3) Go long the dollar. It will take some remarkable tightening by the Fed to convince investors that the dollar’s future looks promising. If they adopt an aggressive plan to raise interest rates, silver prices will likely lose much of their support. At the same time, the dollar should strengthen against foreign currencies. In such an environment, a bullish bet on the dollar itself makes sense. Buying shares in the PowerShares U.S. Dollar Index Bullish Fund (NYSE:UUP) is equivalent to going long the USD and short the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

4) Put options. Buying put options gives you the right to sell a stock at a specific price in the future. If you think the SLV is going to plummet by the end of May, you could buy put options that give you the right to sell shares in the ETF at a specific price – let’s say at $45. If the price of SLV falls below $45, you could go to the open market, buy the shares on the cheap, and re-sell them at the put option price. Incidentally, put options on the SLV spiked last week (per the Wall Street Journal) – an indication that investors are growing concerned about a silver sell-off.

5) Short the miners. Shorting the shares of specific silver mining companies could pay off. As the price of silver falls, so too will the profits miners reap. Silver explorers (companies that are yet to break ground on a mine) could be particularly vulnerable to a downdraft in silver prices. I’d caution, though, that you avoid shorting any company that could be subject to a buyout bid. Randy Smallwood, the CEO of Silver Wheaton Corp. (NYSE:SLW), went on the record recently predicting a wave of acquisitions when silver prices stabilize. If you’re caught shorting a company that’s bought out, your brokerage account could get cleaned out overnight.

Related

THE FACEBOOK OF CHINA?


3 MORE reasons to invest in the RenRen IPO


THE SKY’S THE LIMIT?


What happens when silver hits $50 an ounce?


SILVER EYING $50/OUNCE


Silver just five trading days away from all-time record high price


ARTIFICIAL MARKETS


Silver market manipulation can’t be ruled out


PUT YOUR MONEY WHERE YOUR MOUTH IS


How to invest in food stocks

FORECLOSURES ‘R’ US


3 reasons to buy stock in Zillow’s IPO

Could oil hit $250 barrel in 2011?

If $250 oil did come to pass by December, we’d be looking back fondly on the days when the U.S. unemployment rate was just 9 percent and the national debt was a paltry $14 trillion.

On the heels of the turmoil in Egypt, a small number of investors started making bets that oil could run as high as $250 a barrel by December 2011. Open interest in the $250 call option for December delivery rose to 242 from 142 on Feb. 1 and stayed there on Feb. 2, Bloomberg reports. The call option would give the buyer the right to purchase oil at $250 per barrel by the end of the year.

Preposterous? Perhaps. Stephen Schork of the consulting company Schork Group Inc. in Villanova, Pennsylvania, compares the $250 call option to buying a lottery ticket. It’s a bet that the Suez Canal could get shut down by violence in Egypt and/or political problems could spread to some of Egypt’s oil rich neighbors – countries like Saudi Arabia, which is expected to pump 8.48 million barrels of oil a day this year.

“Investing is all about probabilities — and these worst-case scenarios are outliers with at best single-digit odds,” writes Evan Newmark of the Wall Street Journal. “Not impossible, but very improbable.”

And that’s good. If $250 oil did come to pass by December, we’d be looking back fondly on the days when the U.S. unemployment rate was just 9 percent and the national debt was a paltry $14 trillion. That handful of investors who bought the December call options wouldn’t have long to celebrate, either. They’d probably be using their profits to build underground bunkers in the woods.

Related

BYE BYE OIL


Death to Exxon? A sythentic fuel maker hopes so


DROPPING DOLLARS


Signs double digit inflation is coming to U.S.

HAPPY DAYS


3 reasons U.S. stock market forecast for 2011 is bullish


TIGER MOMS


Chinese ‘Tiger Moms’ company, Tsingda eEDU, to IPO in 2011


IPO CALENDAR


The unofficial tech IPO calendar for 2011

SHIMMERY SILVER


Top 5 reasons to invest in silver bullion