Options Trader Bets That Silver Can Lead the Resource Trade Higher Into 2021

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Silver's big gains in 2020 have been on the minds of many investors in the resource trade.

Though the red-hot metal has cooled down over the last couple of months, it is still on pace to double the gains made by gold this year. As the U.S. dollar continues to weaken, some traders are betting that silver's surge can continue well into 2021.

"Taking a look at [silver ETF] SLV, you see calls outpacing puts [by a ratio of] 3 to 1, after being as imbalanced as 4 to 1 in earlier parts of the trading session. Taking a look at implied volatility, options are implying about a 17% move in either direction between now and March expiry," Bonawyn Eison, managing director of equity derivatives at XP Investments, said Monday on CNBC's "Fast Money."

A 17% shift higher would put SLV right around $28 per share, but one trader is betting that might be only the beginning of what silver is capable of doing in the new year.

"There was a buyer of 10,000 of the SLV March 28/34 call spreads, paying about 70 cents," said Eison. "So you're risking 70 cents here to make about $6."

Profits on this trade max out about 39% higher than where SLV closed Monday's session, but the trade requires what would be a remarkable move higher in order for upside participation to take effect. However, that isn't the only way this trader can monetize their position.

"I think this is a momentum trade. You've got three months of time value at your side, I expect this to be a momentum trade where the [trader] actually takes some of this off into [a move] higher," said Eison.

A quick jump up in SLV would raise the premium associated with these contracts, allowing this trader to sell out of their position at a profit, instead of holding onto these calls until March expiration and taking ownership of SLV at a price of $28 per share.

SLV was trading slightly lower in Tuesday's session.


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