iShares Silver Trust Options (SLV): Unusual Trading Activity

| September 25, 2012 | 0 Comments

SLV OptionsOptions in the iShares Silver Trust (SLV) are lighting up our tracking system this morning with huge put spread activity. 

The beauty of SLV lies in its simplicity.  It offers investors the price performance of spot silver by issuing shares backed by physical silver.

This fund represents a direct investment in the underlying commodity and does not invest in equity securities or futures contracts.

In addition, investors can also use SLV as a vehicle to speculate on silver prices.

So, what’s the trade?  Read carefully because it’s a little more complex than usual.

The iShares Silver Fund is just off the six-month high it reached last week, but a long-term option trader is anticipating a decline.

So far this morning, SLV is up 0.73% to $33.17 a share. The exchange-traded fund touched $34.05 on Friday, its highest price since the 52-week peak set in February.

Today’s option activity stretches all the way out to January 2015.  This expiration is available only in a few underlying assets.

The trader bought 13,000 of the SLV $26 strike put options for $3.80 and sold 13,000 of the SLV $38 strike call options for $5.10.

The open interest in each strike was fewer than 1,000 at the beginning of the day, indicating that this is a new position.

From the way this trade looks, it appears to be a bearish one.

As a result, come two years from now, the trader would keep the $1.20 credit if SLV is between $26 and $38 at that long-term expiration.  Still not a bad return for a 12 point gap in the stock price.

So, how is SLV constructed?

Unlike most ETFs, this fund does not track an index.

Instead, the fund holds silver bullion, which it stores at the London branch of JPMorgan Chase. SLV’s price reflects the market price of one ounce of silver, less the accumulated expenses of the fund.

Now there are two major benefits of owning SLV…

First, the fund offers direct exposure to silver prices.  In fact, SLV is the next best thing to owning silver coins.

And second, silver prices are not highly correlated with stocks, so the ETF can add diversification to a portfolio.

Bottom line…

SLV is likely to stay in this fairly tight trading range as investors continue to take risk and then take risk off.  So it’s doubtful we’ll see a reversal in SLV anytime soon.

We’ll come back in a while and see how this trade is working out.   

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.