Options activity in silver-backed ETFs soared on Monday as speculators attempted to jump on the silver bandwagon pushing prices up as much as 8% before a sharp pull back

Source: Angela Moon and Doris Frankel (Reuters) April 26, 2011

NEW YORK/CHICAGO (Reuters) -

Options activity in a silver-backed exchange-traded fund soared on Monday as speculators attempted to jump on the "silver bandwagon" following a surge that brought the price of silver within a hair of its all-time record.

Silver rose as much as 8 percent on Monday before pulling back sharply when a failure to pierce the all-time high from 1980 unleashed a wave of technical selling amid record volume in U.S. futures.

"It seems like silver has become one of those things investors think they have to own since it's had such a tremendous run," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com in Chicago.

"But they need to limit the downside (risk), considering the run in silver prices."

Other trades in the iShares Silver Trust (SLV.P), the world's largest silver-backed exchange-traded fund, suggest that investors may be betting on a sharp reversal after a huge rally in silver prices.

"With the 14-day RSI (relative strength index) rising above 90 this morning in silver, reflecting the parabolic nature of its recent move, all it took was a slight dollar bounce ... to get silver and other commodities to reverse course," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Options traders exchanged more than 1 million contracts in the fund or 3.8 times the average daily turnover, according to options analytics firm Trade Alert. In all, about 919,000 calls and 515,000 puts crossed the tape.

BIG DEMAND FOR MAY OPTIONS

Traders flocked to the May SLV call options with strikes ranging from $39 to $60, as "short-term speculators turned to the ETF options as a vehicle for playing the recent surge in the white metal," said WhatsTrading.com options strategist Frederic Ruffy.

The May $37 puts were among the most popular after more than 51,000 contracts changed hands.

Steve Place, a founder of options analytics firm investingwithoptions.com, noted that during the session, the majority of calls were being sold and the majority of puts were being bought.

"This may not be speculating, but it could be hedging against pre-existing long positions in the SLV," he said.

Place added that if an investor wants to place a bearish bet on silver, a put backspread is a good way to structure the overall risk.

The strategy entails selling one put option and buying two out-of-the-money put options with the same expiration date.

The iShares Silver Trust rose 27 cents to $45.83 after hitting a new intraday high of $47 earlier on Monday.

Volume was brisk with a total of 34.8 million shares traded on Monday in the iShares Silver Fund.

U.S. May silver futures SIK1 jumped as much as over 8 percent to a intraday high of of $49.82 an ounce, just about 50 cents off the all-time peak for futures at $50.35 hit on Jan. 18, 1980. May settled up $47.149 an ounce, up $1.09. (Editing by Jan Paschal)