What To Do About Silver

The largest silver ETF by assets and volume, SLV, has rallied about 28% this year. Assuming you are not already long, what is the best way to enter a new trade?

Speed Matters

We observe that the price ratio of silver to gold is approaching levels unseen since September of 2019. A large chunk of this rally has happened over the last few trading days.

The recent sharp rally has also caused silver volatility to abruptly spike. The interesting aspect of this spike in volatility is that, in contrast to the March volatility spike, the speed of inversion in the volatility term structure has been much faster this time. Due to its high speed, we consider this inversion to be much more temporary than the one we observed in March.

We believe there may be opportunity to profit from this sudden inversion by selling short-term and buying mid-term volatility through call option calendars.

The first graph shows the price of silver as a percentage of the price of gold. The second graph show the 20-day implied volatility for SLV and GLD. The third graph shows the contango of the volatility term structures for SLV and GLD. Contango is calculated as the percent difference between 6-month implied volatility versus the 20-day implied volatility. Negative contango means the volatility term structure is inverted (backwardated).

Convex Asset Management LLC emphasizes that investing in futures, options, and other derivatives involves substantial risk and is not suitable for all investors. There is a possibility that you may sustain a significant loss, including a complete loss of your investment capital. Past performance is not necessarily indicative of future results. Investing involves risks, and any investment strategy carries the risk of loss. Before investing, carefully consider your financial objectives, level of experience, and risk tolerance. You should only invest funds that you can afford to lose and seek independent financial advice if you have any concerns or questions.