There is a scenario every trader fears: when your screens go dark. In that situation, the only way to understand where the market is trading is to start making phone calls to your trading partners. To a certain extent, this event already happened during Thanksgiving night when CME servers stopped working and only resumed operations after 10 hours. No one will ever know for certain what happened during those 10 hours, but surely many took notice that at that very moment, something likely “snapped” in the market. Can you trust a market that goes dark at the exact moment when it is needed the most? Of course not. This is the reason why dealers started to look for alternatives, dust off their contingency plans, and re-run their risk models, especially concerning silver.
A critical element in every market is liquidity, which by definition is the amount of orders a trader can execute in a market without impacting the price. The more a market becomes illiquid, the higher the risk of sudden volatility spikes. In standard risk models, volatility spikes are associated with a sharp drop in prices, not with upward spikes, since on the way up, an asset tends to increase gradually, broadly speaking. Now, if you take a look at SLV December 29 and January 16 call options’ Implied Volatility, something abnormal just happened: the right tail is abnormally high compared to longer expiries.
In simple terms, what this chart is telling us is that there are some traders who purchased extremely out-of-the-money options, paying a rather high price compared to what standard pricing models dictate. There is only one circumstance when you can observe these sorts of distortions in a market: when traders have grounds to believe that an extreme event can unfold.
When I warned about “WHY SILVER CAN HIT $100 BY MARCH,” I based my analysis on a growing structural problem in the silver market that is heading towards a scenario where supply and demand for physical silver become significantly unbalanced. Knowing that the gap is already stretched to a point where there is a significant chance that buyers of physical silver cannot fulfill their demand, it is natural for prices to continue rising regardless of the extent of price manipulation characteristic of the silver market. What if one day a buyer comes to the market and there is no offer for silver left? That’s when chaos triggers.
In that specific scenario, whatever price is quoted on screens does not matter anymore, and effectively, those who have inventory are in such a strong position that they can set the price, especially when buyers are forced to close a trade. If you are in a position where a growing number of industrial buyers are forced to purchase (the alternative is to shut down their operations and make no sales, hence no revenues), and a large financial institution is sitting on a significant amount of short silver contracts where its counterparties demand delivery, the price at which a trade can clear becomes a factor of where the holders of the inventory will be willing to let go. How to determine that specific price point? Usually, it comes down to who has the deepest pockets and can pay the highest price.
As a matter of fact, there are traders out there in the market who believe this type of situation can happen very soon and paid a significant price to either profit from or hedge their risk of such an event. This is undeniable.
According to standard option pricing models, the probability of such an extreme event occurring is currently lower than 0.1%, way beyond the 99th percentile of a normal distribution. However, every trader who has spent enough time in the market knows that, in reality, the probability of tail events is greater than what standard pricing models can gauge. If silver were the stock of a company, anyone would already assume that someone took this kind of position based on insider information about an event that, once public, could trigger a significant jump in the price of that stock. Are we in this kind of situation with silver? I hardly believe there is someone out there who has “sure information” that can trigger a jump in the price above $100 by the 29th of December or the 16th of January; however, those traders might have run the numbers, perhaps have a better count of the real level of physical inventories in the system, especially at Comex and LBMA, and built a strong conviction about the possibility that the silver market can “break” all of a sudden when few people are prepared for it.
Interestingly, there is a story that has been circulating on the internet for several weeks now that, let me be clear, I could not confirm, but I would like to bring to your attention since it is awkwardly aligned with the current unusual positioning in the options market for silver, where, as of EOD 17th December, there are the following Open Interests on SLV options with 16th of January expiry:
– 78,605 OI at 60$ strike
– 32,646 OI at 65$ strike
– 21,034 OI at 66$ strike
– 73,988 OI at 70$ strike
– 4,068 OI at 80$ strike
Furthermore, as if these weren’t enough, there is an unusually large amount of open interest on Silver Futures American Options expiring in February. Precisely 7,538 options at 80$ strike and 6,861 options at 85$ strike.
The story I am referring to (“Silver: A Perfectly Organized Short Squeeze“) claims that the day the CME operations went down for 10 hours, several Chinese sources close to the SGE and SHFE revealed that a massive buy order for 400 million ounces (equivalent to 12,441 tons of silver) had been placed that day. What a heck of a coincidence, right? Anyhow, the order was allegedly placed by a short seller who had to quickly cover its positions. Interestingly, this story aligns with what I personally heard around those days and shared on X, although I cannot confirm whether the two are connected:
According to this story, JPMorgan Chase had to lease 4,000 tons from ICBC, the world’s largest Chinese bank, an LBMA member and clearing house, committing to return them after 3 months. These 4,000 tons did not come from the Shanghai stockpiles, which anyone can consult daily. Did they then come from the vaults of Chinese banks in London? That’s very likely.
If we combine the fact that the physical silver leased by JPMorgan Chase from ICBC must be returned after three months, at the beginning of January, with the options positioning in the silver market, the two elements align incredibly well.
Let me be clear, in today’s analysis, I am simply bringing you the hard numbers and additional information that have been brought to my attention. Feel free to interpret them, but I suggest not ignoring them when several events have already occurred and confirmed significant stress mounting in the silver market. Furthermore, based on my latest conversations I shared on X, institutional traders are already talking about a severe tightness in the market, and I can assure you the matter isn’t being taken lightly.
As Google Trends shows, there is still very little interest from the broader public in silver, but I can assure you that if an extreme event triggers a sharp repricing, it will be hard to ignore, and broad retail FOMO demand will only worsen the situation, not the opposite.
