The surprising rationale behind a million-dollar bet on silver

Silver has surged 12 percent in the past month — but one trader appears to believe that the real rally may just be getting started.

In one of Thursday's biggest options trades, a large number of bullish calls were purchased on the iShares Silver Trust, which is better known by its ticker symbol, SLV. Specifically, 19,500 25-strike call options expiring in January 2019 appear to have been purchased for $0.47 cents per share (that exact price strongly suggests that the trade was initiated by the buyer). Since each options contract controls 100 shares, the total cost of the trade was $916,500.

The SLV closed Thursday trading at $17.10, and this trade breaks even at $25.47, so the ETF would theoretically need to rally about 50 percent in order for the trader to make money. Given silver's notable volatility, and the long time between now and the trade's expiration, this may not be as outlandish as it sounds; in April 2011, SLV briefly found itself above $48.

Still, context suggests that this is not the work of a quixotic silver lover.

"What the trade likely represents is a hedge of some sort," Susquehanna's head of derivative strategy, Stacey Gilbert, said Thursday on CNBC's "Trading Nation."

Since the strike price is so far away from the SLV's current level, "This isn't someone saying, 'I love silver, this is the best way I can get exposure to silver.' It's likely someone who's hedging a broader portfolio and using silver as a hedge, in the same way that you might use gold as a hedge," Gilbert said.

The trade will likely only return a profit "if there's an issue where silver takes off and precious metals in general take off," she continued. "It's likely to hedge a broader portfolio."

In other words, a firm with a large holding in stocks might have purchased these options as a sort of "insurance" policy — figuring that an event that takes down stocks will simultaneously spur silver. Silver and gold tend to have an inverse relationship with most equities, since metals rise in times of fear and stocks rise in times of optimism.

So far this year, though, both stocks and precious metals have rallied significantly. Of course, a repeat of this simultaneous move higher wouldn't be much of a problem for a firm with bullish positions in each.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more