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More Rough Seas Ahead for Silver, Options Say

When whales like George Soros and Carlos Slim are making bearish bets on silver, even usually contrarian options traders are wise enough to recognize that the tide may be turning against the commodity.

Silver has slid 25% over the past four days — the largest 4-day drop since March 1980. This still leaves the metal with a 17% year-to-date gain and up 107% from a year ago, but options action in the IShares Silver Trust ETF is forecasting stormy seas ahead for the commodity.

"People will pay almost any price for SLV options, they just want to be long volatility SLV," Scott Nations, NationsShares President said. Implied volatility — a measure of how much volatility is expected in a security — is at 58% for the SLV, up 24 percentage points from the end of 2010, the Options Action contributor noted.

He is noticing some trades in the SLV that could indicate silver prices will be volatile for a long time.

Options activity actually predicted SLV would turn lower about two weeks ago, when put volume began to outpace bullish call volume.

Over the past three days, put volume has surged to well over four times the historical average, meaning that investors are looking for more declines.

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