Silver Volatility Returns: Bearish Trade Still in Play

In a post a few weeks ago, I noted that implied volatility for the Silver ETF (SLV) has rarely seemed to rise beyond 40 to 45%.

Well, as of Friday it reached 50% or so. And with Monday's price action, it may get even higher. (I'm writing this on Sunday night)

What's interesting is that near term implied volatility has recently been significantly higher than the volatility expected in, say, 180 days as you can see on this chart (prepared on Friday April 29)

(Click to enlarge)

Right now, all other things being equal, the market is willing to pay relatively more for insurance that expires in one month than for insurance that expires in six months. Typically the opposite is more of a bullish sign, but there's nothing typical about silver lately. These volatility spikes come and go, but silver has continued to rise even as volatility rises -- at least so far.

"Bearish trade" update

This surge in volatility inspired me to revisit one of the "bearish bets" on silver that I thought weren't all that bearish a couple of weeks ago.

If you recall, there was a big to do about a trader who bought $1 million worth (100,000 contracts) of the July 25 SLV puts when the price was 10 cents. That was back when SLV traded at about $39.25. According to the open interest data, those 100,000 puts are still out there (although they could have changed hands, but I doubt it).

As of last Friday, those same puts were bid at 9 cents each and offered for 12 cents – even though SLV was up almost 20 percent as of Friday. Whoever sold those puts to that trader for 10 cents would certainly welcome a plunge in volatility, preferably soon.

Here's a look at the bid/ask prices of both those July 25 puts and the same strike for October – along with the implied volatility for both those options until April 29

Those October 25 puts fell significantly, while the July 25 puts still seem to be in high demand. That's a bit odd, but volume and open interest for the July 25 puts is way higher for July than it is for October.

So options on SLV aren't all that cheap right now -- not a great buy, but they might be worth selling. Selling a few near-term out of the money puts might work out great.

As I mentioned, I'm writing this on Sunday evening, so I have no idea how the options will trade, nor whether I'm that brave. Stay tuned ...

Disclosure: I am long SLV.