The sharp outperformance we have seen by silver (SLV) to gold (GLD) since late October has brought the silver/gold relative spread back up to a multi-year high. In fact, the latest spike we saw in the relative spread is almost identical to the 18.78% outperformance we saw in May 2024 (which also marked a “top” in the spread for the better part of 18 months). While the silver outperformance is impressive, what stands out to me is the move in call skew between the two. On this latest move, SLV 2-month (Jan) 25-delta call vol moved up to 56 and traded as much as 2.6x where GLD 40-delta 2-month (Jan) call vol trades (around 21). Interestingly enough, the last time call skew traded this “rich” was also back in May of 2024 when the SLV/GLD relative spread also spiked and peaked. I believe this combination of silver outperformance, coupled with SLV upside calls trading “rich” to GLD calls, creates several interesting opportunities if currently involved in either (or both).
The current move in the SLV/GLD relative spread looks VERY similar to the spike we saw back in May ’24 (we saw the spread and vol normalize shortly after)
GLD 2-month (Jan) 40-delta calls back trading near their cheapest skew to SLV 2-month (Jan) 25-delta calls (bottom chart)
Since I remain very constructive on the bullish metals/commodity trade, especially now that the US$ index (DXY) appears to have “failed” at resistance and is once again headed back lower (as we are about to cut rates again) I am not saying to fade this move, but I do believe we could start to see a bit of a “catch-up” trade in gold vs silver.
If long both silver and gold here is a trade to consider:
Sell SLV Jan 16th 61 calls 6x (23d, 49.8 IV)
Buy GLD Jan 16th 400 calls 1x (38d, 21.3 IV)
Trades for ~ EVEN (SLV 53 and GLD 387.50 refs)
This costless trade involves selling the 15% upside SLV calls to buy the 3.2% upside GLD calls and is a great way to not only position for a possible rebound/catch-up in the GLD/SLV spread, but as mentioned above captures call skew just below the 2-year highs. This costless trade has ~ twice as much long notional exposure in gold vs silver to start. This trade can also be established as a stand-alone trade given attractive setup (but then would mean you would be short SLV calls without the long underlying stock or futures)
US$ index (DXY) continues to trade lower after “failing” at resistance
The other trade to consider, specifically if long silver is to sell some “expensive” upside calls against the existing position. Typically when we have seen sharp upside moves in call volatility, WITH the underlying rallying, it has proven to be a bit of a decent short-term contra indicator (like in October). With silver up sharply along with the call vol, it appears to be an attractive time to perhaps sell some covered calls.
Trade:
Sell SLV Jan 16th 59 calls @ 1.47 (SLV 53 ref)
Trade Details:
- Selling the 11.3% upside Jan calls following the 27%+ rally off the October lows
- Call sale yields 2.8% (23% annualized)
- Upside breakeven on trade is $60.47 by Jan 16th expiry (14% above current levels and after the 27% rally)
- Good way to take advantage of the sharp spike in upside call vol as silver has also rallied
- Please contact me or the 22V sales team for updated pricing and execution of either trade idea
We saw a similar spike in call vol back in October, which also marked a short-term peak for silver
