Precious metals have fallen by the wayside in 2013, as evidenced by the respective year-to-date deficits of 21% and 33.8% for the SPDR Gold Trust ETF
(NYSEARCA:GLD) and the iShares Silver Trust ETF
(NYSEARCA:SLV). As my colleague Alex Eppstein takes a look this morning
at the option activity surrounding GLD, here's a quick look at the sentiment levied toward SLV, as the ETF struggles on the charts.
Despite SLV's technical troubles, option traders have displayed growing optimism
toward the ETF in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), SLV's 10-day call/put volume ratio has jumped to 7.53 from its month-ago reading of 2.80. Even more telling, perhaps, the current ratio ranks in the highest percentile of its annual range, meaning calls have been bought to open over puts at an annual-high clip.
It is a trend that was witnessed in yesterday's session, during which around 70,000 calls crossed the tape -- more than two times the number of puts that changed hands. The January 2014 25-strike call easily emerged as the most popular contract on the day, where 17,129 positions traded for a volume-weighted average price (VWAP) of $0.33. Implied volatility ticked higher, open interest soared overnight, and data from the ISE confirms buy-to-open activity.
By purchasing these deep out-of-the-money calls, traders will begin to profit with each step north of $25.33 (strike price plus the VWAP) SLV takes through January expiration. Not only does this represent expected upside of 30.2% to the ETF's current perch at $19.45, but also territory not explored since mid-April. As such, delta for the call is docked at 0.15, suggesting a slim 15% chance the option will move into the money over the course of its lifetime.
As mentioned, the iShares Silver Trust ETF has had a rough go on the charts this year. A recent attempt at technical redemption was met with stern resistance at the $20 mark, and this round-number could continue to serve as a ceiling over the next several weeks. In the front-month series, peak call open interest rests at the 20 strike. This lofty accumulation of calls could translate into an options-related speed bump
, as the nearly 32,300 contracts that reside here are unwound ahead of the August 16 close.
This article by Karee Venema was originally published on Schaeffer's Investment Research.
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