Silver bugs and young traders temporarily found a common interest; silver.
At the top of the list of things I thought I would never see is boomers and young investors joining forces in their quest for higher silver prices. Before last week, online trading forums and social media chatter was focused on newer and exciting alternative assets such as cryptocurrencies while aged investors were content on buying precious metals bullion to hide under their beds or in secret vaults in their garage. However, the youngest and oldest market participants temporarily joined forces in an attempt to influence silver prices higher in hopes of a short squeeze similar to what was seen in GameStop and AMC stock.
In the end, the silver short squeeze appears to have failed. There are several reasons for this; for starters, silver is a global asset that can be mined whereas GameStop stock was a nearly forgotten asset with a limited number of shares. More importantly, while GameStop stock had an unhealthy number of short positions, silver speculators and fund managers were already long the market. It is hard to squeeze the shorts if there aren’t many of them.
Although the so-called short squeeze fell short, it wreaked havoc on traders caught in the wrong place at the wrong time. Predominantly, those who were short silver call options through the weekend prior to the squeeze suffered a significant amount of stress and potentially steep losses. This is largely because the strategy of the internet mob was to not only buy silver outright but buy call options in droves in hopes the market makers or the option sellers will need to buy futures to hedge price exposure. As a result, options that were worth less than 20 cents ($1,000) on the Thursday before the squeeze traded on Sunday night near $3.00 ($15,000). For those trading quantities, or in a smaller account, that could have dealt a devastating blow. Further, the price of silver briefly poked above $30.00 per ounce, near the previous spike high in August and at a round figure popular for option sellers. This created a conundrum for those short the $30.00 calls; hedging additional upside exposure through the purchase of futures contracts created substantial downside risk but unhedged upside exposure was excessively dangerous given the unique environment. The failure of futures to hold above $30.00 created a scenario in which any short call sellers who hedged their upside risk paid a large price on their downside risk exposure. In short, they were put through the wringer.
