Stocks quoted in this article:
Option volume on the iShares Silver Trust (ETF) (NYSEARCA:SLV - 32.87) is running slightly ahead of normal today, most noticeably on the put side. One long-term contract -- the January 2015 26-strike put -- has seen volume of more than 13,000 hit the tape today, easily trumping existing open interest.
It looks as though these puts, which were likely purchased near the ask price of $3.80 per contract, were paired with January 2015 38-strike calls, which appear to have been sold to open near the bid price at $5.10. The net credit collected from this large LEAPS spread was $1.30.
But wait ... there's more! Apparently, this trader paired the spread with shares of the underlying stock. That shifts the overall strategy from a bearish synthetic short (or a risk reversal) to a moderately bullish collar.
Profits for this three-legged position peak at or above the 38 strike and are capped at the call strike less the amount paid for the stock plus the net credit from the call/put spread. Losses -- which are maximized at or below $26 -- are limited to the stock purchase price less the put strike less the net credit.
Essentially, this long-term trader expects upside in the SLV but doesn't see it breaking above $38 in the next two years or so. And furthermore, he wants to guard against any significant collapse in the ETF, hence the protective put purchase.
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