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SLV Volatility – Strike While The Iron Is Hot

Lesson is to jump fast when a winning trade develops


Don’t look now but SLV may be percolating. That’s the iShares Silver Trust (NYSE: SLV) for active options trading investors.

The ETF’s recent 4% surge marked the first break of a daily resistance level since the cascade of silver selling began in mid-April. If you were waiting for signs that the liquidation clouds were parting and the bulls were returning to SLV, the wait may be over. Time will tell whether this short- term pop turns into a bona fide trend reversal.

What interests me more is the behavior of SLV implied volatility (IV) which has staged quite the roller coaster ride over the past two months. A brief analysis of its behavior reveals a key lesson for option volatility traders. During the recent death spiral in SLV’s share price, implied volatility shot through the roof as investors flocked to purchase options in droves. At its zenith the IV on SLV peaked at 67% — a level we now know as unjustifiably high. As SLV returned to normalcy we saw demand for options rapidly subside, bringing implied volatility crashing down with it. Check out this volatility chart.

Source:  Livevol Pro

In situations like SLV where we see sharply elevated implied volatility levels, one must be quick in entering short volatility trades. If you wait too long for the stock to stabilize or reverse back into an uptrend you usually miss the lion’s share of the volatility crush. That’s what happened in SLV.

Find more option analysis and trading ideas at Options Trading Strategies.

True, its recent stabilization has given traders more confidence to enter bullish-type option plays like short puts, but the implied volatility is much lower than a few weeks back. My one regret with playing SLV this month is that I did not act sooner. I failed to remember that when it comes to high implied volatility the time to strike is while the iron is hot.

At the time of this writing Tyler Craig held no positions in SLV.

Follow Tyler Craig on Twitter@TylersTrading.

Article printed from InvestorPlace Media,

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