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Thursday, August 18, 2022


Road To Commodity Meltdown Paved In Silver Put Options

 Today’s tickers: SLV, COF, DPS & ADI

SLV – iShares Silver Trust ETF – The rebound in investor sentiment following the post-earthquake, fear-driven spike in the Japanese yen was quite remarkable, with global equity benchmarks almost rebounding to February peaks. During that recovery period something critical developed in the currency world that lifted commodity prices to new heights. The debate between FOMC members regarding whether less rather than more stimulus was needed, was eclipsed by the ECB’s reversal of monetary policy, which in turn hobbled the dollar. Demand for commodities took a further step forward as investors swiftly concluded that the dollar was most likely to trail the euro even in a risk-on environment. That has made the cascade in commodity prices all the more spectacular today as growth-sensitive currencies lose favor. The IMF downgrade to growth and Goldman’s warning over a possible stall in the advance has investors targeting downside risk across the commodity field. Silver prices, already at a 30-year high, are likely to stumble further and faster according to a sizable put butterfly strategy on the iShares Silver Trust ETF today. The put ‘fly follows Monday’s massive bearish play on the SLV in which some 100,000 July $25 strike puts were picked up at a premium of $0.10 apiece. The 0.40% decline in the price of the ETF’s shares to $39.05 this afternoon saw the asking price on the July $25 strike puts more than double to $0.21 per contract at times on Tuesday. In contrast, the put’ fly player accelerated the bearish view on the price of silver by targeting May contract put options. The 25,000-lot May $34/$36/$38 bearish butterfly spread positions the player to attain maximum benefits should the price of SLV shares fall around 7.5% to $36.00 by expiration day. The spread cost the trader a net $0.31 in premium per contract, but prepares him to accumulate up to $1.69 per contract if the price of the underlying fund settles at $36.00 at expiration. Nearly 400,000 option contracts have changed hands on the SLV as of 1:15pm in New York.

COF – Capital One Financial Corp. – The ratio put spread is a popular strategy with options traders initiating near-term bearish positions on Capital One. It looks like an investor populating the May contract today is either augmenting the size of ratio put spreads he purchased last week, or constructing a fresh position to prepare for COF’s shares to head lower by expiration next month. Shares in the financial services company are currently 0.85% lower on the session to arrive at $51.06 just before 11:45am in New York trade. The pessimistic player appears to have purchased roughly 5,500 puts at the May $50 strike for an average premium of $1.59 each this morning, and sold around 11,000 puts at the lower May $43 strike at an average premium of $0.22 a-pop. The one-by-two spread results in an average net cost to the investor of $1.15 per contract. Thus, the put player stands ready to make money should the price of the underlying fall another 4.3% off the current price of $51.06 to breach the average breakeven point on the spread at $48.85 by expiration day in May. Maximum potential profits of $5.85 per contract are available to the investor in the event that COF’s shares plunge 15.8% in the next few weeks to settle at $43.00 at expiration. Open interest patterns at the May $43/$50 strikes suggest one or more investors purchased around 3,000 of the closer-to-the-money options and sold roughly 6,000 of the lower-strike puts last week. Capital One Financial Corp. is scheduled to report first-quarter earnings after the close of trading on April 21, 2011.

DPS – Dr Pepper Snapple Group, Inc. – The brand owner, manufacturer and distributor of a range of non-alcoholic beverages saw heavier than usual demand for its options today. Shares in the maker of 7UP and Snapple increased as much as 4.6% during the first half of the session to touch an intraday- and new 9-month high of $39.89. More than 4,810 option contracts have changed hands on DPS as of 12:55pm, which is more than half of overall open interest on the stock of 7,957 contracts. Call options are far more active than puts, with upwards of 11.7 calls trading on the beverage maker for each single put in play. Investors traded some 3,060 calls at the April $40 strike, versus previously existing open interest of 955 contracts. Two-way trading traffic in the calls suggests some traders are positioning for shares in DPS to climb higher ahead of April expiration, while others are dubious of a near-term push above $40.00 by expiration on Friday. Buyers of the calls are slightly more active at the April $40 strike today, paying an average premium of $0.38 apiece for the contracts. Investors long the calls stand prepared to profit should Dr Pepper’s shares rally 1.2% over today’s high of $39.89 to surpass the average breakeven price of $40.38 by expiration. The jump in demand for call options on DPS helped lift the stock’s overall reading of options implied volatility 14.3% to 29.75% in early-afternoon trade. Dr Pepper Snapple Group is scheduled to report first-quarter earnings ahead of the opening bell on April 27, 2011.

ADI – Analog Devices, Inc. – The semiconductor manufacturer popped up on our ‘hot by options volume’ market scanner at the start of the trading session due to bearish activity in May contract puts. Shares in Analog Devices are down 2.1% to stand at $37.63 as of 11:20am in New York. Options players positioning for ADI’s shares to extend losses in the near term traded more than 2,800 in-the-money puts at the May $39 strike on open interest of just 149 contracts. Nearly all of the put options appear to have been purchased for an average premium of $2.07 apiece. Put buyers profit in the event that shares in Analog Devices drop another 1.9% from the current price of $37.63 to breach the average breakeven point on the downside at $36.93 by May expiration day. The rise in demand for put options on the stock helped lift the overall reading of options implied volatility on ADI 4.5% to 29.18% by 11:30am.

Andrew Wilkinson

Senior Market Analyst


Caitlin Duffy

Equity Options Analyst

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