Tuesday, February 28, 2012

Silver Prices Rising: Traders Are Betting Big

By now it's no secret that Silver has wildly outperformed the major indexes and it's fully-precious big brother, Gold, so far in 2012. The question, naturally, is whether or not it's too late to get on board.

In the attached clip Jon Najarian and I discuss how the "smart money" is playing silver and what it means for individual investors trading in the pits or at home via the wildly popular iShares Silver Trust etf (SLV).

In addition to the industrial function of silver making the metal a semi-appropriate way to play an economic recovery Najarian says the metal represents, "a cheaper way to play the flood into precious metals." Regardless of silver's 27% run year-to-date and positioning near heavy resistance at $35 an ounce, Najarian still "likes silver a lot."

In no small part what the TradeMonster.com co-founder is seeing are notoriously short-term thinkers in the options pits buying the $35 calls out to June, a stunningly long view for the quick-trigger set.

Also supporting the notion of options players' bullish stance on silver, at least according to Najarian, is the trading activity in a lesser known Proshares UltraShort Silver (ZSL) --a double-inverse trading vehicle designed to move $2 higher for every $1 drop in silver.

"If you thought silver was going to break (lower) people would start buying ZSL calls," Najarian says.

In other words, traders would be levering up their bet in multiple ways by using calls to ramp up risk on an ETF that's levered in the first place. I wouldn't touch such a play with my worst enemy's cash but it is a decent reflection of how the bold traders are positioned.

Relatively lower risk silver bulls are buying the aforementioned calls in massive size, Najarian says. Big as in "monster," as in $10 million wagers that silver will go not just higher, but much higher between now and options expiration in late June.

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