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An hour before trading on the Nasdaq and NYSE Arca was disrupted, the iShares Silver Trust (ETF) (NYSEARCA:SLV) was targeted by an option trader anticipating some intermediate-term volatility. Specifically, at 11:14 a.m. ET, symmetrical blocks of puts and calls were purchased on the exchange-traded fund (ETF), with the speculator hoping to profit from a major move in either direction over the next few months.
Digging deeper, the trader purchased 7,500 December 25 calls for the ask price of $0.73 apiece, and simultaneously bought an equal number of December 20 puts for $0.68 each. Both legs of the spread were marked "opening," suggesting the speculator opened a long strangle for a net debit of $1.41 per pair of options.
To make money on the play, the strategist needs SLV to either breach the $18.59 level (put strike minus net debit), or to rally north of $26.41 (call strike plus net debit) by December options expiration. From the SLV's current price of $22.23, it would take a retreat of roughly 16% to hit the lower breakeven rail, or an advance of close to 19% to surpass the upper breakeven rail. Should the fund stay between the strikes through expiration, the trader's maximum risk is capped at the initial net debit.
The SLV has tacked on 16.3% so far this month, but has spent the past few sessions dawdling between $22 and $22.50. The ETF's Relative Strength Index (RSI) still stands at 73 -- in overbought territory, suggesting more consolidation could be in the short-term cards.
From a sentiment standpoint, option traders have been upping the bullish ante lately. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open almost five iShares Silver Trust (ETF) (NYSEARCA:SLV) calls for every put during the past two weeks. In fact, the resulting 10-day call/put volume ratio of 4.58 stands just 7 percentage points from a 12-month peak, suggesting option buyers have been snatching up SLV calls over puts at a near-annual-high clip.