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Wednesday, December 6, 2023

Bear Play on Silver ETF

Today’s tickers: SLV, BAC, TZA & X

SLV – iShares Silver Trust – It looks as though commodity traders have it all to play for in 2010. Raw materials prices had surged especially late in 2009 as they felt the tailwind of a declining dollar. However, an abrupt about-face helped pull the rug and several commodity prices went into a tailspin. The irony here is that it’s a strengthening global economy backed by evidence of rising demand for industrial inputs that has lifted silver and copper prices independently of the hoarding for the precious yellow metal, which grabbed all the headlines recently. Shares in the iShares Silver trust, meant to track the price of an ounce of silver are still holding well above last week’s $16.64 low, although are down today at $16.83. One investor appears to have extended protection against a fall in the price of silver by selling almost 40,000 January put options and buying the same amount of contracts in the February contract. We don’t know whether the investor is already commodity bullish and just aims to protect unnecessary losses in the event of a sudden dollar upturn, or whether this is an outright bet that the commodity rally is overdone. If the latter is the case, the investor will benefit in the event of a 10.8% decline in the price of the ETF. The option market tells us that there is a 16% chance of that happening by expiration in February.

BAC – Bank of America – Shares at the banking behemoth are 0.7% lower today at $15.18 and although implied options volatility is hardly changed at 33.6%, it does appear that the at-the-money straddle has been sold somewhat during this morning’s trade. The volume patterns at both January $15 strike calls and puts appears married and there is actually heavier volume on the put side where sellers raked in average premiums of around 31 cents during the morning. In the middle of December shares recorded a low at $14.83, while we need to glance all the way back to the start of November and well before the announcement of BoA’s new chief executive to see weaker price action that drove its shares down to $14.21. Naked selling of put options at today’s premium dictates a breakeven share price at expiration of $14.69, which is effectively where today’s put sellers are buying shares in the event they are indeed assigned before expiration next month.

TZA – Direxion Small Cap Bear 3x Fund – Investors appear to be jumping headlong into leveraged protection against a decline in small cap companies according to the near-30,000 lot volume in the January contract. This inverse fund moves counter to the market, which means that while everyone else is in festive mood, this fund’s price drops and since it’s leveraged threefold, the moves can be pretty drastic. Call options are therefore used to speculate on a decline in the value of the universe of small cap companies and if they do witness declines, this ETF rises in value as do the call options. Shares today are higher by 0.3% at $9.47 while heavy options volume underpins the $9.0 strike where an average 85 cent premium is recorded. Open interest at the strike of less than 4,000 lots suggests that this is the work of a bear looking for a New Year stock market swoon.

X – United States Steel Corp. – Investors used a 2.9% decline in the price of U.S. Steel Corp. to $54.82 as a chance to write put options on the company. At least 1,000 put options were written at the $55 strike using the contract expiring in February. By taking in an average $3.80 premium today implies the investor is willing to pay an effective $51.20 for shares, which of course might not happen if commodity prices continue the New Year on a firm footing. The investor could also be banking nice gains using options. Only yesterday the stock traded as high as $58.19, while those puts traded 1,500 times yesterday at around a $3.40 premium.


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