Monday, February 28, 2011

Implied Volatility on Silver (SLV) is Cheap!

I am impressed by how low the implied volatility of silver is, as measured by the option premiums on the silver exchange traded fund (SLV).

These low premiums are inconsistent with the expressed view of silverbugs that the price of silver is going to reach a multiple many orders of magnitude of the mining cost.

I will look into arbitraging this inconsistency.

5 comments:

WSM said...

How is low implied volatility inconsistent with bullishness on silver?

Kid Dynamite said...

I don't suppose you have a chart of historical implied vols in silver? I would love to see that...

What data are you using to conclude that current implied vols are cheap? I thought they looked expensive! but I had no means of comparison...

CP said...

Look at the put premiums for example, even out to 2013. There's a lot of money to be made if silver went back to 2-3x mining cost.

Kid Dynamite said...

ahhh. so more of a qualitative argument than a quantitative one...

CP said...

You can buy an SLV 30/25 jan 12 put spread for $1.5, which implies a 70% chance that SLV will be above 25. That seems rich.

Silver bears completely discount the possibility that their parabolic metal could ever crash, even though it costs nothing to mine.