Friday, May 6, 2011

SLV, ZSL - Silver Prices, Silver Bubbles, Silver Skew, Silver Risk

ZSL (UltraShort Silver) is trading $21.99, down 9.6% with IV30™ down 11.9%. SLV (Long Silver ETF) is trading $35.43, up 5.1% with IV30™ down 7.9%. The LIVEVOL® Pro Summaries are included below.





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ZSL is the UltraShort Silver ProShares ETF. With silver (and other commodities) catapulting lower, the question asked is if the "bubble" is over. Hard to say, but today, silver is rallying ~5% after having fallen ~ 30% in the last few weeks. The skew in both ZSL and SLV caught my attention -- keep in mind, ZSL is an Ultra Short ETF.

ZSL has traded over 36,000 contracts on total daily average option volume of just 7,842. Calls have traded on a 2.6:1 ratio to puts. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action -- it's sort of rapid fire on a dozen or so strikes in the front two months.



The ZSL Skew Tab snap (below) illustrates the vols by strike by month and gets to the vol phenomena that caught my attention.



We can see a clear term structure where the front months are more expensive that the back. I find it helpful to look at the Skew Tab from a couple of months ago to give us some sort of relative comparison. The skew chart from 3-18-2011 is included below.



In this snapshot we can see that the vol difference between the short-term and longer-term options was much smaller than what we see today -- though there was the front > back paradigm. The larger divergence we see in the current skew is the option market's reflection of greater near-term risk than long-term as this "bubble" risk works it's way out.

While we're at it, let's look at the same two days (today and 3-18-2011) in SLV skew. I've included both of those below.





Although the shape is different for ZSL (more parabolic), the same phenomenon exists. The month-to-month vol difference has opened up substantially, reflecting the same sort of near-term risk/uncertainty.  In fact, back in March, the front month ATM vol was lower than both the second and third months.  Cool...

Finally, the ZSL Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



It's hard to tell in this snapshot, but the ETF has popped hard in the last week (ish). On 4-28-2011, this ETF was ~ $13.50. Yesterday it closed at $24.34 or an 80% gain in a commodity (Ultra) ETF. For reference (and a slightly better illustration), I've included the Charts Tab for SLV (below).



The commodity price drop and vol rise are much easier to see in this snap.

Possible Trades to Analyze
I'll leave the direction and the security agnostic here. The interesting trades to examine seem to be analyzing the vol differences month-to-month.

A bet on convergence (so back to mid March shapes) involves selling the front and buying the back. A bet on catapulting commodity prices continuing could involve the same trade, but if your conviction is to the near-term, then owning the front juice might be the trade to examine. For SLV, that might mean doing intra-month skew trades rather than the month-to-month term structure.

This is trade analysis, not a recommendation.

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