Moderately Bullish, But Bullish Nonetheless

Hey Traders,

It seems like these days, I’m seeing a new headline about inflation concerns every hour, on the hour … if not more! 

It looks like plenty of investors are getting a little spooked (which I get!), and I’m sure there’s plenty of traders out there looking to hedge their bets …

Now, as you probably know by now, in times of market uncertainty, I turn to volatility

But many traders look to precious metals as a form of risk management.

Now, typically when people think of “precious metals” their mind immediately jumps to gold.

But gold is just one of the alternative investments that can be used to diversify your portfolio.

In particular, silver has been having a moment in the sun over the last year, tacking on a whopping 70% increase in the last 12 months.

And this trader is betting big that it’s not done yet …

Now, typically, most people aren’t going to go through the trouble of buying physical silver bullion.

So as an alternative, trading a precious metal ETF is an easier and more liquid way to diversify your portfolio with precious metal exposure.

Of course, you can also trade options on precious metal-based equities, which lets you further manage your market exposure and control your risk!

(You can guess which method I’m a fan of, I’m sure …)

Comparing the two most popular precious metals, silver is significantly more volatile than gold, thanks in large part to the fact that silver has many industrial uses, which can help drive (or drop) demand for the shiny stuff.

One-year SLV chart courtesy of StockCharts

iShares Silver Trust (Ticker: SLV) is one of the most noteworthy silver ETFs in the market, and like silver, SLV has enjoyed some solid returns over the last year, although it has also seen its share of volatility.

Lately, however, a nice pattern of higher highs and higher lows seems to be appearing on SLV’s chart ..

And on Tuesday, there was one particularly large bullish bet that this pattern could continue in the months ahead, and that SLV could even be ready to notch its highest price since 2012.

A $16M Potential Payoff For Nine-Year Highs

The SLV  trader I’m talking about opened a bull call spread. Like the bear put spread we looked at last week, a bull call spread involves buying and selling an option simultaneously to help lower the initial outlay of a trade … though at the cost of limiting potential gains.

A bull call spread involves purchasing calls at a lower strike price, while selling calls with the same expiration date at a higher strike price.

This indicates that the trader believes that the underlying stock has moderate upside potential, but will likely stall out before reaching the higher strike price.

In this case, this trader seems to think SLV has gas in the tank to rise above $32, but won’t have enough juice to break $39.

Given that SLV has only breached $27 a handful of times in the last 12 months, even this “moderate” options play seems quite bullish.

On Tuesday, the trader purchased 25,000 contracts of the September 30th 32-strike calls for $0.73. Typically, purchasing these calls outright would require an initial outlay of $1,825,000! (That’s $0.73 x 100 shares per contract x 25,000 contracts.)

However, by selling the September 30th 39-strike calls for $0.28, this trader was able to knock $700,000 off their initial purchase price, as well as lower the overall break-even price of the trade.

And the maximum potential payoff for this bullish bet? 

A whopping $16,375,000! (That’s the $7 difference between strike prices – $0.45 trade cost x 100 shares per contract x 25,000 contracts.)

Of course, by opening the 39-strike call contracts, this trader is also capping their maximum profit. Should SLV rise above $39, this trader will see their profits start to evaporate.

But again, looking at SLV’s price action over the last nine or so years … This seems like a reasonable bet to make, given that SLV hasn’t tapped above $39 since 2011.

10-year chart courtesy of StockCharts

Only time will tell, but if inflation fears persist, and demand for precious metals continues to rise, this trader could be looking at quite the payday.

Your Only Option,

Mark Sebastian

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