Silver's 6.5% Slump Boosts Put Options' Appeal as Insurance

$Silver - main 2603(SImain)$  's 6.5% slide is bolstering the appeal of put options as an insurance against a potential continued slump, days after money managers cut their bullish wagers on the precious metal. 

Put options open interest, or the tally of outstanding put options, more than doubled to 121,350 contracts in just over a month. The surge came as silver futures climbed 53% over that period, strengthening the case for owning put options that allow their holders to sell the metal at a preset strike price. That could help put option holders lock in gains from the recent silver rally in case of a sustained downturn. 

The precious metal that's also used in making solar cells, batteries, and electrical circuits for data center infrastructure, has seen demand outpaced supply every year since 2021, according to a report by the Silver Institute. 

Last year, silver was added to the U.S. Geological Survey (USGS)'s list of critical minerals because of its vital role in U.S. economic or national security.” That highlights its essential function in domestic manufacturing and further fueled the bullish case for owning silver.

But amid the rally, money managers have been paring their bullish wagers on silver, cashing in gains from a relatively illiquid market compared to that of gold. In the week ended Jan. 20, their combined net long positions declined 25% to 11,326 silver futures contracts, the lowest in almost two years, the latest Commodity Futures Trading Commission (CFTC) data compiled by Bloomberg show. 

Implied volatility (IV), which measures the market's expectations of the commodity's price changes, signals that the wild swings are likely to continue. IV percentile was at 100%, which means the current volatility is higher than 100% of the trading sessions over the past year. That means buyers are paying higher premiums for call and put options, making it attractive for investors and speculators to sell those contracts. 

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