Bearish Options: On Silver ETF Rise Again Is Gold/Silver Ratio At Play? 2011

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Bearish Options: On Silver ETF Rise Again Is Gold/Silver Ratio At Play? 2011

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Yesterday, an options trader made a nearly $1 million bearish bet that the iShares Silver ETF (SLV) would fall 37% by July.

On Tuesday, bearish options trading on SLV jumped 3.7 times its four-week average, reports Bloomberg. More than a quarter of all volume for puts to sell SLV was concentrated in 100,000 contracts. The trade would profit most if the ETF drops 7.9% to $36 before May options expire, according to analysts.

“This is interesting in the context of yesterday’s trade,” Caitlin Duffy of Interactive Brokers (IBKR) said in the report. “There’s similar sentiment between yesterday and today because this runup has lost momentum and may be due for a turnaround.”

SLV closed down 0.3%, or 12 cents, at $39.09 a share. That’s still just about 2% off SLV’s closing high set on Friday.

Separately, the gold/silver ratio — which measures the relative value between the two precious metals — is hovering around its lowest levels since the early 1980s. The more the ratio has dropped, the less of a bargain silver has looked when compared to gold.

Still, the ratio was at nearly half its current level when silver reached its zenith at around $50 an ounce some 31 years ago. So it still has room to drop, at least based on long-term historic patterns.

That has some thinking it might be a good time to play the ratio against itself, so to speak, to gain an edge.

“For traders looking to play the current move in precious metals but with less risk than an outright long position in silver, betting on the gold/silver ratio may make sense,” writes Sumit Roy at HardAssetsInvestor.com.

A bullish play would be to go long SLV while going short the SPDR Gold Trust (GLD). A bearish move would be to go in just the opposite direction.
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