Sunday, May 8, 2011

The 68,294,229,502,717.3% Annualized Return in Silver ETF Puts (SLV)

I saw the April 12 story "Silver Options Trader Bets $1 Million on Price Drop by July" figured someone was hedging a position and promptly forgot about it.
From Forbes' Great Speculations blog:

Would The Silver Medalist Please Stand Up?
On April 11 the price of silver was trading 50% above its corrective low to $26.00 per ounce dating back to late January. It was also a big day for options trading on the iShares Silver Trust (Ticker: SLV) that saw the birth of one massive bearish play that generated a ton of media attention.

As many options observers noted at the time, without knowing the motivation of the investor, it was hard to fully interpret the trade. Sure, it was a massive 100,000 lot naked options trade that predicted a one-third correction in silver’s value before July, but none of us are privy to whether this investor was already long to the eyeballs of silver futures, shares in the silver exchange traded fund or plain-old mining shares.

The market absorbed that bearish options play on April 11 with shares in the SLV narrowly escaping the attention from technical traders of a potential “reversal top.” That same day this trader made his million-dollar bet against silver, the share price closed only marginally lower.

The cost of buying bearish protection was a mere 10 cents that day or $10 per 100 shares in the underlying SLV ticker. At the time many onlookers pooh-poohed the notion that silver or commodities in general would perform according to this admittedly expensive script. After all, it represented the views of but one investor....

...So back to the silver options trade on the SLV. The investor didn’t get this trade right. He or she got it spectacularly right. And what everyone else overlooked when silver’s price all but topped $50.00 per ounce was that it only added to implied volatility during the ensuing decline.

For this single option trader the revolving fundamentals created a perfect storm. Shares are really only down a little from where the trade went on but what’s worked to his or her benefit is the enormous surge in implied volatility. This is perhaps the largest driver of an options premium and overnight has helped drive the options premium up by 162% to 63 cents per contract....MORE
HT: ZeroHedge for the headline:
 "As 88% Of SLV Shares Outstanding Trade Yesterday, The "Silver Put Buyer" Generates A 68,294,229,502,717.3% Annualized Return".

No HT for inexplicably linking to the DJ Morningstar mention of the Forbes piece rather than to Great Speculations with HT to DJM.