After the metals pulled back today, James Turk told King World News that we may see a squeeze in the silver market next week.

This Week Is Important
August 19 (King World News) – 
James Turk:  “It is easy at this time of the year, Eric, to be focused on vacations and to lose sight of the precious metal markets, but this week is important. It may hold some clues about what might happen during September option expiry next week…

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In recent years, month end option expiry has often been a pitfall for precious metal bulls. Prices are usually soft because the writers of call options sit on the price aiming to have as many calls as possible expire out of the money. It used to happen like clockwork, but less so this year. The metals have been trading differently of late, particularly silver. So I am wondering whether we will see some surprises next week. Instead of falling prices during option expiry, could we possibly see higher prices?

September is a particularly important month for silver, so I want to focus on that. And there are some interesting developments. Spot silver today is trading about 3-cents over September delivery. So physical silver remains tight. I would also note that Comex open interest in silver remains high. Even though there has been some short covering, the high open interest means there are a lot of shorts still to cover. The big move in silver from under $15 to $17 is a result of new money and new buying coming into the market, and not from short covering.

These are positive factors, but the real vulnerability of the shorts is silver options. I don’t want to get into all the Greek letters associated with options, but two are important to this discussion – delta and gamma. Like everything related to markets, there is risk. Options are no different. To control risk, option sellers like to keep their ‘delta’ balanced.

A Gamma Squeeze?
That objective becomes increasingly difficult when markets jump or fall in unusually large moves. You will recall silver’s abnormal 95-cent 1-day trading range on August 13th, which probably left some option writers off side. Big moves lead to ‘gamma,’ a measure of acceleration and the worst fear of option sellers. 

For example, as the price of silver rises, out of the money calls start becoming more valuable, and if the move is big enough and fast enough, ‘gamma’ goes berserk. It forces the sellers of a call option to buy metal to maintain a balanced delta position. It could lead to a gamma bloodbath. This has actually happened on the Comex. In 1985 a firm called Volume Investors went bankrupt because it allowed a customer to sell naked gold options. In that gamma bloodbath gold jumped 12% in one day. So I am watching silver very closely here to see whether there will be a gamma bloodbath next week.

The option writers have had it their way for a long time, Eric, when silver was in the doldrums. But this chart of silver’s daily close in London shows how things have changed.

We May See A Squeeze In The Silver Market Next Week

Silver is in an uptrend, and its recent sideways trading range around $17 was working off a temporarily overbought market. But the big picture for silver looks positive, and the writers of silver options have every reason to be very nervous about next week.”

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