Silver ETF Options Heat Up After Best Week Since Brexit

The SLV ETF is backing down from several layers of resistance

Aug 15, 2017 at 1:14 PM
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As the U.S. and North Korea flexed on one another last week, sending the stock market's "fear gauge" skyrocketing, traders sought safety in tangible assets like gold and silver. The iShares Silver Trust (SLV) rallied 5.1% over the course of the week, marking its best week since early July 2016, just after the Brexit backlash -- and just before the fund went on to touch a two-year high. However, the SLV exchange-traded fund (ETF) is now backing down from multiple layers of resistance, and SLV put options have been flying off the shelves.

At last check, SLV shares were down 2.2% at $15.78, after last week touching their highest point in roughly a month. The overhead $16.20-$16.50 area is not only home to SLV's descending 200-day moving average -- which halted the fund's rebound attempts in June -- but also represents a roughly 50% Fibonacci retracement of SLV's rally from its 2015 lows to its 2016 highs.

SLV silver ETF chart

In mid-July, large speculators' net positions on silver fell to a two-year low, following six straight weeks of distributions, per Commitment of Traders (CoT) data. Since then, it's been three straight weeks of accumulations on the metal.

Some of those new silver bulls may have been hedging with long puts on SLV. The ETF's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 0.46 -- in the 94th percentile of its annual range. While this ratio indicates that call buying more than doubled put buying on an absolute basis, it still suggests very accelerated put buying of late, compared to the norm.

Today, SLV put volume is running at two times the average intraday clip, with roughly 26,000 contracts exchanged, compared to about 23,000 SLV calls. About half of the action has transpired at the August 15.50 put, with buying activity detected. However, Trade-Alert suggests much of the put buying may be to close, as about 15,000 August 15.50 puts were sold to open in late July, around the time of the Fed meeting.

As for "vanilla" options buyers, it's worth noting that SLV's Schaeffer's Volatility Index (SVI) of 18% is in just the 16th percentile of its annual range, suggesting the fund's short-term options are attractively priced right now, from a volatility standpoint. Likewise, SLV sports a Schaeffer's Volatility Scorecard (SVS) of 88, indicating the ETF has exceeded options traders' volatility expectations in the past year.

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