“When the lambs are lining-up single-file ready for slaughter, you want to own the slaughterhouse”
~ MJ DeMarco (The Millionaire Fastlane)
Imagine making $2300, $23000, and yes, even $230,000 in one freaking day. Well you can if you own the slaughterhouse.
If you haven’t noticed, a lot of people are talking about silver. And if you look at the silver ETF’s (SLV) stock chart, you can see why. The stock has been in a virtual ascension into the heavens.
However, one look at this chart and a Fastlane Millionaire sees something else — a supply/demand imbalance that reminiscent of a “bubble” and when bubbles burst, Fastlaners make tons of money.
I see irrational exuberance pervading into Team Consumer and the mainstream.
You see, when the plumber/gardener/kindergarten teacher/truck driver starts talking about any particular investment, you know it is overbought and time to sell. Or in Fastlane terms, time to profit.
I immediately thought of my favorite Fastlane quote which I mention in my book … when the lambs are lining-up single file ready for slaughter, you want to own the slaughterhouse.
When I examined the chart of Silver (SLV) on Friday April 29th, I saw an opportunity to OWN THE SLAUGHTERHOUSE. You see, one of my own personal rules in short term investing is that stocks/commodities NEVER go straight up; they always pull back due to greed, however, they can go STRAIGHT DOWN due to fear.
Add in the Plumber Theory (When any particular investment is touted/espoused by Team Consumer, the retail buying public, it is time to sell.) and I saw an excellent short-term profit opportunity. Another buying consideration: The VIX is at historically low levels; any increase in volatility improves the value of the option. Throw in that the silver mining stocks have not been performing strongly vis-a-vie the commodity itself. To me, all of this spelled a nice short-term opportunity.
LQQK at the chart again above.
What do you think is going to happen when all the investors who bought, suddenly want to get out? Whomever owns the slaughterhouse is going to make a killing.
And I did.
On Friday April 29th, I bought PUT OPTIONS on the SLV ETF. Specifically, I bought the July 2011 option at a strike of $45. (For the novice, a put option gives you the RIGHT to sell any stock at the specified price for a limited time.) At the time, SLV was trading at $47.40. I proudly proclaimed my buy on Facebook expecting some bull resistance. I received none. Good or bad sign?
I paid $2.99 for each contract.
Fast forward to Monday, May 2nd.
One trading day.
Silver (SLV) sold off and closed at $42.83 – a loss of over 9%.
My option position gained 77% IN ONE TRADING DAY — those $2.99 contracts are now worth $5.30.
Here is the profit breakdown:
If you bought 1, 10, 20, 50, 100, 1000 contracts respectively here are the #’s. (No, I didn’t buy 1000 contracts, but I wish I did!)
$299 turned to $530 – $231 profit (Max risk $290 – 1 contract)
$2,990 turned to $5,300 – $2,310 profit (Max risk $2,990 – 10 contracts)
$5,980 turned to $10,600 – $4,620 profit (Max risk $5,980 – 20 contracts)
$29,900 turned to $53,000 – $23,100 profit (Max risk $29,900 – 100 contracts)
$299,000 turned to $530,000 – $231,000 profit (Max risk $299,000 – 1000 contracts)
The beauty of this trade is that anyone can do it — anyone can own the slaughterhouse. Additionally, this trade fits in perfectly to a Fastlane risk philosophy — unlimited upside, limited downside.
Opportunities like this don’t come by very often which is why I pounced on it … and no, I didn’t expect the sell-off to happen the very next day! I sold 1/2 my position and will ride the rest with the “house” money.
DISCLAIMER: I own this position and this is not a particular recommendation to buy or sell any particular security.