The Silver Squeeze on Vol

Hey Traders,


There are VIX indexes for just about everything you can imagine.


For silver, it’s VXSLV (which kind of sounds like a Super Bowl number).


And it blew higher on Monday:



78% is incredibly high. 


The highest in three months, in fact.


And while it’s not as high as during the VIX peak in March, it’s pretty darn close.


So the question you might be asking yourself is …


Will silver volatility keep going?


The answer is no.


I don’t believe VXSLV is going much higher — and neither is silver.


Monday, Chicago Mercantile Exchange raised margins on silver futures by 18%. That is going to increase the cost of owning futures significantly.


Traders also need to remember that the CME can (and will) do it again if silver futures keep going up.


SLV is pretty tightly connected to silver futures …


And unlike GME or AMC, SLV has a TON of float (tradable shares outstanding) and not a lot of open short interest.


When SLV backs off, VXSLV will back off as well.


Big Silver Straddle
That might be why a trader put on a MASSIVE short straddle at the end of the day.


In the closing seconds of Monday, a trader sold 17,000 SLV straddles expiring in March.



The trader sold the 29 calls and the 29 puts at the same time …


The trade does have some positive delta to it, making more if SLV rallies to 29.


But it also does well if SLV moves back to the 24-25 range and implied volatility drops.


One thing to remember, the silver market is large and complex. Small traders are going to have a tough time pushing around silver for an extended period of time.


A Golden Silver Move
I’m looking for ways to short silver vol.


I like it fundamentally over the next year … but not on this short-term pop.


A put sale that attempts to take delivery of SLV makes some sense here, especially with VXSLV at near 80.


SLV could drop and a sale of the March 24 puts at 1.10 could be a nice win.


Notice below how a 10% drop in SLV with a 50% drop in VXSLV actually produces a profit on a sale of the 24 puts.


The Option Pit VIX Light is YELLOW, meaning the VIX will move wildly in either direction.


Your Only Option,


Mark Sebastian

 

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