Massive Silver Options Block Trade in June $21 Calls

Vince Lanci's picture

Via Soren K. and MarketSlant

We received an interesting note from George Gero at RBC today for which we thank him. First the facts.

  • Today, someone traded a large block of  Silver Options
  • The options were June $21.00 calls
  • Number of contracts traded was 3,100 lots at a price of 16.3 cents
  • Volume is approximately 2.56% of the aggregate open interest.
  • Initiating interest was apparently from the sell side as the price was a full Vol under previous.
  • Option delta was 15 and  is not typical of vanilla producer hedge  choice. 
  • Strike price is right where Silver miserably failed last July.

Heres the Tape:

Here's the Option Value Charted. OUCH 

Here's The Market

Interactive Chart HERE


If the initiating interest was from the sell side, the knee jerk reaction from people is to call it a bearish trade. This could be true. But history and experience tell us that is not the case in a large majority of the instances where calls are slammed. Frequently we test the strike at least before dumping. Here are the most probable reasons someone would sell silver calls in this fashion and a quick analysis in italics after each

  1. Bearish Speculation- this is not a smart thing to do. Silver options are a roach motel, and it is almost impossible to exit when one has to. 
  2. Informed Player Trade- a dealer with flow on his book like a massive sell order in futures. He  can take a punt knowing he has a brick wall above the market to use- this is unlikely as prop desks do not take that kind of indirect risk these days. Selling calls because of a futures sell order is not advised 
  3. Informed Flow Trade 2- a client has options to sell or did sell on a deal to hedge production, the dealer merely added an implicit fee and scalped his client- less likely than in the past, due to screen transparency. If true, more likely from a foreign client with no tech or option savvy.
  4. Bullish Fund- a long fund with a price target of (say..) $20.00 decides they will sell $21 calls to create a dividend and if the market spikes above their target, they will either hold their futures or roll their short call higher- covered call writing essentially


Here are the Leading Candidates Based on Experience and Info

The Strangle Seller:

For years there was a Fund/ CTO/ CTA who made his living selling strangles and collecting premiums. This "fund" would grind out a decent return for years at a time for his investors with no real accounting for VaR of his clients. Every 6 months or so, he'd blow up. Then he'd raise new money and start over.Here is how he'd execute/manage risk

  • ??sell calls at an opportune moment- sometimes in a rally, sometimes in a sell-off
  • Sell puts using the same approach, thereby legging into a strangle short
  • If an option became dangerously close to blowing him up, he's roll the short higher (calls) or lower (puts)
  • He would sometimes sell more puts in a rally to raise premium while rolling his short call higher. essentially a 3-way trade.
  • He would throw in the towel by just covering the short option causing him grief and hoping the other leg was worthless.

What to watch for: If a similar size block trades on the put side, you have your confirmation that this is a strangle seller. And you have a likely path of future behavior if things go poorly for the short.

The Massive Futures Sell Order By Captive Client or Fund:

No conspiracies here. a fund, dealer, or some player is long (or not). There is a sizeable order above the market near $21.00 to sell futures. Even better, a Market-if-Touched type of order. An options trader at the firm decides to sell calls knowing this, and he has access to take the other side of the sell order if the market gets away from him. Classic "non conflict" flow trade (if a dealing bank) as the futures desk is not selling in front of the CAPTIVE client order.

What to watch for: the market hits $21.00 and several things may happen. 1) a massive selloff at least the first time up. 2) if no options trade then assume the short does not care 3) next time up, the selling might not be there as the short option guy took it out, and now wants the market to go higher so his negative gamma doesn't force him to turn seller.

The Investor Covered Call Game

Nothing happens.

The Smart Producer Hedge

Miner wants stock to continue to perform on upside with Silver price and has large operating leverage. Therefore he decides not to hedge production in futures but instead sells calls. Likely candidates include miners whose CEO gets stock as bonus. Also not uncommon for producer  to buy teeny calls against a sale of meaty calls to participate in the Armageddon trade.

The Player Covered Call Game

Or alternatively, this is a Player who is long futures from a much lower price, and 3,100 calls are a tiny portion of his long position. A firm like PhiBro in the past would be happy to buy those calls back as sloppily as they could, knowing the marketmaker hedges would drive their futures up substantially. They made their living in energy doing things like this. They also liked to buy calls hard when they were selling their long futures to create exit liquidity. In the end they'd be long synthetic puts, and short an additional boatload of futures.

The Producer Hedge Trade Pinned Strike:

We will pin 21 at expiry at best. Why? Because the seller had a ton of futures more to sell than the calls he sold. And the chart suggests that may be the case still.

The Producer Sap Trade

This is a fun one, but very rare. The producer has decided to not hedge production via futures but instead sells calls to lower his cost basis. Simple idea. Usually makes sense if the miner has free cash flow.

Problems arise in a rally when he has the silver for delivery but can't make the margin call on the short options. A classic example was the Ashanti-Cambior fiasco in 1999. These miners needed financing and the banks that gave it to them also took the other side of their short calls. Then, Y2K nonsense caused a rally. Ashanti can't make the margin call, their credit line is closed, the bank prop desk buys futures for itself, and the client pays 99% vol covering its short options through the same bank. Bonus: The bank oversees the liquidation and sale of Ashanti to its new owner, Anglo Gold. At least Vampires can't drink the blood of the dead.

Unknown Unknowns and JP Morgan

To be sure we do not know every possibility. The most important thing to know is the type of seller.Producer, Intermediary, Fund, or Player. The future market behavior helps narrow the choices of the trader. Right now, we'd assume nothing and look for a massive put sale. If one comes in, then we know that the short is a non-Player spec susceptible to being wrong, and will act if he is.

One should also remember that if a massive trade in Silver goes down, JP Morgan either is involved or knows about it. So watch their behavior, and assume nothing directionally.

Good Luck


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Secret Weapon's picture

Maybe he pushed the wrong button.

Tlön Uqbar's picture
Tlön Uqbar (not verified) Feb 17, 2017 2:41 PM

That's the summer solstice.

Tlön Uqbar's picture
Tlön Uqbar (not verified) Feb 17, 2017 2:42 PM

Who the fuck cares?

Silver Savior's picture

If it has to do with silver I care. I am making it my primary investment. Physical silver that is.

Dg4884's picture

month, after year, after year.  I'll just buy more when it goes back down to 16.

Conax's picture

Over my head.

So I'll just hold fast.

joego1's picture

The way I play the silver market;

I CALL my silver vendor
I PUT my silver in my canoe

That is All

Vooter's picture

"Today, someone traded a large block of Silver Options"

I think the identity of that "someone" should be publicized. Otherwise, who cares?

El Hosel's picture

Quite profound unless you realize silver has spent almost its entire life below $21..... Not to mention Silver has rallied for a few weeks and appears tired here.... and its a rigged market..... Just sayin

NoWayJose's picture

Along with the options betting against silver - they also bought two cases of hammers to hand to the monkeys!

donomiller's picture

Odds are those options expire worthless

Albertarocks's picture

Which is why the large player sold those calls.  He doesn't think silver will rise to $21 by June.  The question is "which big player bought them?"  And "why?"

Silver could rise to $21 and the seller still keeps his premium.  Anything over $21.16 and he's going to have to cover.

Bottom line... some big player thinks silver remains below $21 by June and a different 'big player' thinks it will rise above $21. To me the net result of this transaction is that it doesn't reveal anything of value.

pocomotion's picture

OP-EX corner the market by making a statement?

Know shit's picture

Well you have something that is called silver in your hand and something else.
This is about something else.

For now something else is coupled to the silver in my hand.
I have the silver in my hand for the time these two will be discoupled.

The something else will be worthless, the silver in my hands on the other hand....

Please call me back when these two are discoupled.

Take care

swmnguy's picture

Are you saying the brown stuff in my other hand isn't Silver?  Then it must be Shinola.  Only possible option.

By your screen name, I'm guessing you'd know, which is why I ask.

Silver Savior's picture

Yep I only trust silver in my hand. They can have all this other fake garbage and it will be worth nothing. 

zagzigga's picture

3,100 lots at a price of 16.3 cents - that's a piddly $50530 worth. A drop in a bucket, insignificant.

Garth's picture

Futures options are for contracts, a silver contract is for 5000 oz. So 3100 options would be about 15,000,000 oz.

Another point is that SIM7C appears to be futures contracts not options. SI is silver futures, SO would be options. /silver_contractSpecs_options.html

DRH's picture

Correct and Comex registered silver is currently at 30 million oz. So this would be a contract for half of the exchanges available silver.

rbianco3's picture

It is small in dollar terms, but if my math is right the play is equivalent to 310,000 oz - more than a full day of average trading volume.

Is it true that options don't directly impact underlying silver price or volume? In other words that trade did not add 300K volume to silver for the day nor did it cause the price to rise/drop. I have hard time conceptualizing how options affect price - to me it seems the other way around but I digress. 

Silver Savior's picture

That's a Kings ransom to me. Imagine how much real silver I could buy with that. 

Ben A Drill's picture

Why do it on a Friday?

Silver Shield's picture

Let these digital momentum monkeys chase fiat...

My physical ounces do not care.

Any day you can trade fake, fiat, future promises on wealth for real, tangible, useful, versatile, vital and eternal silver is a great day for me!

Keep stacking!

Automatic Choke's picture

It isn't that big, and it makes a lot of sense if it is a covered call (the 4th point).


Silver Savior's picture

Well because they were drunk.

El Oregonian's picture

Do I hear $22.00? Can I get a 22.50 bid? $23.00, come $24.00!