Thursday, April 28, 2011

Silver Implied Volatility Rises Over 50

Yesterday, in the awkwardly titled Is Volatility a Better Play for Silver than Direction? I noted that silver implied volatility had managed to push to heretofore unseen heights and argued that future projections based on SLV options prices had led to a high probability short volatility setup.

Of course, no sooner had I posted than SLV began to climb rapidly in price, bringing implied volatility along for the ride. The pattern has continued for the first half of today’s trading session, with silver futures above $49/oz. and the SLV ETF pushing above 48.

The chart below, from, shows the intraday price and implied volatility (red line shows implied volatility for May options) action in SLV for the past five trading sessions. Note that for the most part, silver implied volatility has had a strong positive correlation with the price of the underlying ETF. This is largely because silver is making new highs and traders see the potential for a big move should silver futures break out above $50/oz.

In terms of trading, I still like the idea of a short volatility play on silver and am currently actively managing several positions with both a volatility and directional component.

For directional traders, the lure of huge momentum play is often too much to resist. For options traders, who are essentially trading volatility more than anything else when all is said and done, playing volatility Whac-A-Mole can be similarly enticing. If you jump on this trade, just make sure you are the one doing the whacking…

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[graphic: Livevol Pro]

Disclosure(s): Short SLV at time of writing; Livevol is an advertiser on VIX and More

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