Silver prices have risen sharply over the past four days. Part of this reflected fundamentals in the market. Much of it now appears to be the “Wall Street Bets” crowd of investors trying to collude to push silver prices up in a manipulative squeeze.

Given the aberrant short-term nature of the factor behind the rise in prices, prices should be expected to fall back shortly and sharply.

This is a strong market condition for industrial enterprises to hedge their silver exposure and for investors to buy puts to benefit from any downside move.

CPM wrote a Gold Price Insurance Market Commentary on 16 November 2020. Back then the nearby active December Comex price was $1,887.30. CPM advised a hedge based on the April contract. In the ensuing days gold prices fell to $1,767.20 before recovering, which offered a nice profit on any put-based hedge. CPM had written about using $1,700 strike April 2021 puts, which were prices at $16 on 16 November. During the decline to $1,767.20 the value of the $1,700 put would have risen to approximately $35.

Now would seem to be a good time to put a similar put-based hedge in place on silver. Time frames to hedge silver vary depending on each client, Short-duration hedges make sense, but multi-year high silver prices could be taken as an opportunity by both investors and commercial companies ranging from mining companies to smelters, refiners, fabricators, and others. Using options commercial hedgers and investors can position themselves to profit from any short-term price decline as the current ‘situation’ unwinds, as it will without giving up most of their exposure to rising prices later.

March Comex silver futures prices reached an intraday high of $30.35 on Monday 1 February. At the time this commentary was being written silver was trading around $29.

The increase in prices is reportedly supported by the same group that helped push GameStop equity prices higher in recent weeks. How high silver can go is unclear, but given silver’s history, increased volatility could push silver sharply higher in a matter of days and sharply lower in less time.

Producers, consumers, and investors might buy put options to take advantage of declining prices.

A reasonable expectation is that prices might fall back to the range broadly around $22.80 – $26 in which silver traded for most of the time from September through December 2020.

Purchasing far out of the money options provide for lower costs and a potential for increased returns in percentage terms. Far out of the money options tend to rise in value at a faster pace in percentage terms than out of the money options that are closer to the underlying price when the underlying price is heading in their direction. The spot price does not have to reach the option strike price for this to be profitable: The put rises in value as the price falls, and may be sold back at levels above the strike price on the put at any time before expiration.

As this is being written the put prices for strikes for the May Comex contract were as follows. May Comex options expire in late April.

$25 – $1.20
$20 – $0.18
$18 – $0.08
$15 – $0.04

If prices fell to $25 the prices of these puts might increase to levels such as these. The percentage increases from the original purchase prices can be large.

$25 – $3.30           275.00%
$20 – $1.00           555.56%
$18 – $0.35           437.50%
$15 – $0.12           300.00%

Another interesting approach would be to pay for those puts with call spreads. For example, a producer or investor might buy a put with a strike price of $20, which might rise in value if prices fall toward $20. If prices fell to $23 or $25 the value of that put would increase, and it might be sold back for profit. The put could be paid for by selling a $40 call and buying a $42 call. This would give the option buyer exposure to rising prices, but it would give up $2 of the upside should prices rise above $42, a level above which silver has held only briefly in 1980 and again for a few days in April 2011.

CPM Group provides hedging advise and management services. We never take the other side of a trade, but work for and with our clients.

CPM Group provides a range of services related to asset management and price risk management. We advise investor clients on the normative roles of gold and commodities in investment portfolios, and help them efficiently and effectively invest in these assets. We also provide advise and management services related to effective price risk management, including structuring hedging programs for investors and commercial enterprises.

More information is available by contacting CPM Group at [email protected]

Copyright CPM Group 2021. Not for reproduction or retransmission without written consent of CPM Group. Market Commentaries are published irregularly by CPM Group as market conditions dictate,and are distributed via e-mail. The views expressed within are solely those of CPM Group. Such information has not been verified, nor does CPM make any representation as to its accuracy or completeness. Any statements non-factual in nature constitute only current opinions, which are subject to change. While every effort has been made to ensure that the accuracy of the material contained in the reports is correct, CPM Group cannot be held liable for errors or omissions. CPM Group is not soliciting any action based on it. Information contained here should not be relied on as specific investment or market timing advice. At times the principals and associates of CPM Group may have long or short positions in some of the markets mentioned here.