Massive Silver Options Block Trade in June $21 Calls

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


Analysis


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 many if not lost of the instances where calls are slammed. 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


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