After the large drop in silver on August 11, the price has been tentatively moving higher. Tuesday was no exception as the price gapped on the open and faded back into the previous day’s range. While the movement looks to consolidate gains, the timing of a potential bullish breakout is difficult to predict. The options market on the iShares Silver Trust ETF (NYSEARCA: SLV) saw some rather bullish trading being made as the implied volatility prices another big breakout higher by the fall.
Price movement becomes parabolic when the angle of the advance steepens dramatically, and the volume increases correspondingly. As the dollar began to implode in July, the price of silver accelerated its upward movement and the ratio of gold-to-silver prices began to normalize in favor of silver. When the price dropped last week, the indication was that silver will start to consolidate. The hard thing about waiting for a breakout is that it may happen a lot sooner than you expect.
For SLV, the option implied volatility is such that it is currently rising as the strike prices get higher. This type of skew favors bullish verticals and the unusual option activity on Tuesday was just such a trade. There was a 5,000-contract 20 NOV 20 27/33 long call vertical. The skew makes the vertical cheaper since you’re selling the higher implied volatility option.
Action to Take: The indication by the unusual activity on Tuesday is that big money is expecting a large move to $33 by the November expiration.
Speculators may want to consider doing taking a similar trade through buying the 20 NOV 27/33 long call vertical for around $1.50 or less.