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How big traders are playing silver

By: optionMONSTER
Posted: 1/15/2014 5:40:00 AM
Referenced Stocks: SLV

Silver has been trying to bottom out, and traders are looking for a rebound.

optionMONSTER's Heat Seeker monitoring system detected heavy call volume in the iShares Silver exchange-traded fund, which tracks one ounce of the precious metal. In particular, activity focused on the March 20 contracts, which were purchased in heavy volume for $0.64 to $0.68. More than 35,000 changed hands in the session, quadruple the previous open interest.

Those investors have a right to buy shares of the SLV for $20 through expiration two months from now no matter how high it might climb. They now stand to enjoy significant leverage while limiting the amount of capital at risk if the fund drops. (See our Education section)

The SLV fell 1.32 percent to $19.42 yesterday. It has lost more than half its value since April 2011 but has been trying to hold its ground above $18 in the last seven months. Yesterday's option activity reflects a belief that a bounce is coming.

One block in the March 20s was paired with 10,000 January 2016 23 calls that were sold for $1.90. The investor collected a credit of $1.26 on that transaction and stands to profit from a move to $23 but will be naked short calls if the SLV stays below $20 through March expiration. He or she is probably using the strategy to repair a losing position in the shares.

Overall option volume was quadruple the daily average in the session, according to the Heat Seeker. Calls accounted for about 80 percent of the total.