Posted November 24, 2011
The silver market has been extremely volatile as of late, and today’s action has proven no different. After peaking at 27.95 overnight, silver hovered around unchanged before dropping precipitously for no reason, ending the day down almost 2%.
The large intraday price drop is certainly cause for concern among investors, but digging into the day’s volume action may be a bit more revealing.
Both silver futures and the SLV displayed average to light volume today. The silver futures traded ~56.4k contracts compared to an average of 58.8k contracts over the last 45 days. The SLV traded 21.99 million shares compared to an average of 27.25 million shares.
What this all means is that the conviction in the selloff of silver appears to be waning. Even in the face of another big selloff in silver, with no reason in sight, silver traders did not panic and begin selling into the swoon. Rather, it appears that most holders stood pat and did nothing.
Most traders like to see high volume behind either a downside or upside breakout in order to confirm its conviction. Furthermore, they view decreasing volume behind a continuing trend as a sign that a reversal is imminent. The tailing off of volume behind silver’s selloff is an interesting phenomenon that will have to be monitored.
For now, we recommend selling far out of the money put options on silver futures as a way to profit from the silver correction while still maintaining some margin of protection against a continued pullback. The 25 puts for December futures can be sold for $2.4, meaning the trader will profit as long as silver is above $22.6 at the end of November.
We also like SLW, as it appears to have bottomed before silver. Even with silver selling off almost 2% on the day, SLW traded up a fraction, indicating that selling pressure may have abated on the royalty trust. As silver prices rise, SLW’s earnings will rise at an even faster pace given the fixed amount they pay for silver (roughly $4/ounce) and the variable price they collect.
ALL INFORMATION INCLUDED HEREIN IS THE OPINION OF THE FIRM AND SHOULD NOT BE CONSIDERED INVESTMENT ADVICE. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.