Wallstreetbets $35 OTM Call OptionsIn the chart, you see the out of the money call option on SLV, if you bought on Friday.
Me (Zohar) and my brother (Hanan) had a huge debate about this trade . If we should enter or not. Each one has its personal view about this topic and Wallstreetbets analysis. Long story short if you are not familiar with the analysis: Wallstreetbets says that there is a possible short squeeze that can happen on SLV just as happened in AMC and GME stocks.
My side (Zohar) against the trade:
- Wallstreetbets analysis is that since J.P.Morgan has many shorts on the futures of silver. They will get squeezed because there is a ratio of 250 to 1 of paper traded silver (virtual) to physically traded silver. If he can SOMEHOW force a much higher percentage of delivery of the silver, they will have to go buy it on the physical market and hence drive the prices up.
- Problem #1 : to force a much higher percentage of delivery of the silver, the people who hold with the diamond hands the futures, will need to accept the physical silver, and why in the world anyone will want to do that?
- Problem #2 : the percentage of the people who want to realize the future contract (get the physical silver) is not expected to change.
A solution to #1 and #2 (by Hanan):
The people who want the physical silver (industrial manufactures) will see the hype that happens on silver, and they will buy extra silver so they will not need to buy the silver when it will be priced much higher. All of this will increase the demand and there will be positive feedback on the price of silver which will cause more industrial manufactures to buy more silver…
- Problem #3 : All the paper traded silver is traded to hedge against the price of silver or speculate or fulfill some other financial function. Hence, J.P.Morgan is expected to take that into account in their risk management when taking the other side just as any insurance company takes the risk “the other side” that something will not happen. Also, J.P.morgan is well aware that the percentage of physical silver requested need not change, and all the paper silver trades are “cash for cash”, and not expected to be fulfilled in actual physical silver. This is important! Because they know that they can “pay their way out” WITHOUT needing to go buy back the silver on the silver market to “deliver” it. If they are not going to the silver market and bidding the price up , their risk management will remain the same and no “short squeeze” will happen. They have zero interest to go and “buy back” the silver. They will just give anyone the cash amount he deserves (calculated loss on their side).
A solution to #3 (by Hanan):
The same thing that happened in GME and AMC, that the hedge fund could not pay for their losses, will also happen to J.P.Morgan and they will panic and will try to buy back all the futures they sold. Thus making the rise of the futures pop.
- Problem #4: the size and amount of money that is needed to move the silver market is much more than what is needed to drive a stock with less liquidity up. Just for comparison, GME has 46M float stocks, while according to my calculations there are 592M “float stocks” in silver . What does it mean? That means that if people will have “diamond hands” there will be people who will sell, so the price will not go up that easily, also, there is a very high chance that someone took a long term play, and bought SLV when it was at $15, and he will be very much happy to sell all the way to $40. Thus, helping any “short squeezers to be” to get out! Which will put the brakes on the short squeeze. Remember short squeeze happens because there is no liquidity relative to the people who are short! If there is liquidity short squeeze will not happen!
A solution to #4 (by Hanan):
Since this issue is talked about in every media available, new players are entering the game and can move the price higher despite the liquidity.
- Problem #5: but what if many people will decide to have “diamond hands”? as long as someone will be willing to sell at lower prices, prices can go down fast and sharp on low volume! And there can be a long squeeze and an avalanche effect. This is something one should be aware of.
A solution to #5 (by Hanan):
Since all of the people could drive the price up in GME and AMC, they could do the same in silver. Due to solution #4, many people will stand up and buy at the high prices, and thus the price will not go down.
Wallstreetsbets also claims that since the ratio of silver to gold prices is out of proportion and it is 73 to 1, plus in the last century it was on 15-18 to 1 ratio, that means something has to be wrong!
Problem: does something has to be wrong? Where is this unwritten universal law that there is some universal constant between silver and gold prices? What if for example, since the technology advanced in the last few decades, and gold is in much demand for electronics, and there is a good reason why gold is rising and silver is not. If no one needs silver, why should anyone give a high price on it to buy it?
This trade is out of our trading system rules. Hanan wanted to exploit the situation and enter the trade, Zohar did not. We decided to remain conservative and not take this trade. But this was a very fiery and long discussion we had (5 hours), thought of sharing some of our thoughts.
Who do you think is right?
