Options Traders Brace for SLV Pullback

Silver ETF SLV is entering its most bearish time of the year, leading options traders to target puts at an unusual pace

Apr 18, 2017 at 12:15 PM
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Gold prices have been on the rise in recent weeks, as stocks cool and the VIX spikes amid ongoing political uncertainty. In fact, gold futures traded at five-month highs as recently as Monday. Gold isn't the only precious metal catching Wall Street's attention, however, as silver prices have also been gaining, evidenced by the performance of the iShares Silver Trust (SLV). Not only has the silver-tracking exchange-traded fund (ETF) been hot in 2017, but there's been some notable trading action in and out of the options pits. 

slv etf news

As you can see on the chart above, SLV hit a 2017 high of 17.59 at the end of last week, and recent pullbacks have found support at the 200-day moving average. At $17.24, the ETF is up 14% year-to-date, and it seems many traders are expecting additional upside, too. Specifically, Commitments of Traders (CoT) data shows net long positions on silver are at the highest level ever

silver long positions chart

On a more bearish note, the iShares Silver Trust is approaching what's historically been its weakest point of the year. Data from Schaeffer's Quantitative Analyst Chris Prybal shows the ETF has averaged monthly losses of 2.8% and 2.5% for May and June, respectively. These represent the two worst months for SLV, since inception. 

Options traders certainly appear to be bracing for a pullback. During the past 10 days, the most popular option, based on open interest added, has been the April 17.50 put. Data from the major exchanges confirms traders have been buying to open positions here in recent sessions, meaning they're wary of near-term headwinds for SLV. 

There's similar behavior taking place in today's trading. SLV puts are crossing at five times the expected intraday rate, outpacing calls by nearly 3-to-1. In fact, put volume is on pace to set a 52-week high. The bulk of the activity has gone down at the April 16.50 put, with data suggesting traders are buying to open positions. 

Of course, this overwhelming interest in long SLV puts could be connected to the CoT data mentioned earlier. That is, those going long on the silver ETF may be using put options to hedge against an unexpected drop in the near term. The aforementioned puts will move into the money on an SLV breach of $16.50 by week's end, when the April series expires. 

No matter how you feel about the iShares Silver Trust (SLV), it's a great time to speculate on the ETF using short-term options. This is based on its Schaeffer's Volatility Index (SVI) of 21%, which is lower than 85% of comparable readings from the past year. In other words, volatility expectations are unusually low on short-term SLV options. 

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