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Silver Lining in Silver Puts


It's not always easy to see, but this precious metal is a keeper.


There was some un-American-style bearish speculation about silver the other day. This is via Schaeffer's:

Put volume was unusually heavy last Friday on iShares Silver Trust (SLV), with activity ramping up to five times the norm. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 26,684 puts on silver, compared to just 1,374 calls.

In fact, the security's 10-day ISE put/call volume ratio of 2.15 ranks higher than nearly 91% of comparable readings taken during the past year, revealing that traders have rarely snapped up bearish bets over bullish at a faster pace.

It didn't work out so well yesterday, as silver had a nice rally.

Anyway, I realized that I rarely hit up volatility charts in a name like this. So here they are:

And it's actually a bit different from your garden-variety stock option. Namely, realized volatility isn't a complete flatline, and it's near 52-week lows. Ten-day HV is in the mid-30s, which looks almost exactly average over the last six months. And one-month options trade in the mid 30s as well, so unlike pretty much everything else we look at, the values are about right.

Now there are reasons why perhaps stocks are entitled to a volatility premium that silver is not. Basically, silver's not going to pre-announce an earnings miss, nor is Blackstone going to take it over.

But SPY isn't going to gap down 20% on a pre-announcement either, and it trades at a perpetual volatility premium. So it's safe to say that you get better bang for your buck owning silver options than you do in an index. It's not a fire sale, but at least it reflects the reality of the underlying.

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