Zigler: Playing The Silver Goose

February 10, 2011

We run the numbers to find out silver's odds of going higher—and the chances of a decline.


What's good for the goose is good for the gander. That old maxim was at the heart of a reader's comment on last week's feature, "Options Offer Clues To Gold's Direction."

If you saw last week's piece, you'll recall its premise: Compression in the CBOE Gold ETF Volatility Index (CBOE: GVZ) pointed to an eventual breakout. The odds of an accompanying upside price trajectory in the SPDR Gold Shares Trust (NYSE Arca: GLD) were then compared with those of a decline.

Our reader wanted to know if the silver market exhibited characteristics similar to gold. Well, in a word: no.

First of all, there isn't a ready marker for silver volatility as there is for gold. The CBOE Silver Volatility Index hasn't been launched yet, but we can get a clue about the market's expectations for silver—well, more specifically, the metal's proxy, the iShares Silver Trust (NYSE Arca: SLV)—by tracking the cost of SLV protective puts.

Like other forms of insurance, the cost of puts increases when buyers clamor for cover—that is, when the market's perceived risk of a price break increases. Prices likewise tend to fall when participants become complacent.

Prices of GLD and SLV puts generally move in the same direction, though the silver-tracking contracts tend to be—like silver itself—more volatile.


Gold And Silver Put Indexes

Gold And Silver Put Indexes


This month, however, the price trajectories started to diverge. Gold, which has recently lagged silver, is now perceived as a relatively low-risk trade. Focus on that word relatively.

SLV's historic volatility confirms this notion. Check the figures below against last week's article, and you'll see SLV's price variability is twice that of GLD's:

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