Thanks to electronic trading, markets traded over the weekend as usual. Beginning Sunday night when most people were celebrating the holiday weekend in the United States, the futures market opened for trading. Stock Indices, Crude Oil, Gold, Silver and a number of other Futures Contracts were available for trading. This opportunity for trading, when there were even fewer traders participating than usual, provided for a spectacular move in the Silver market.
Frequently, traders will maintain overnight positions in anticipation of market movement that will aide their cause in the overnight session. All they have to do is establish a stop-loss order and they can liquidate their position with a reasonable loss. In the old days of commodities trading in pits, floor traders would “gun for the stops” in order to produce a bevy of either buy or sell orders and then cover their positions.
For example, let’s say I was short Crude Oil and I wanted the price to go down farther so that I could buy back my short position at even lower levels. If I was a big trader, and I had a pretty good idea that there were stop orders below the market, I might sell extra contracts to attempt to move the market in the direction of the sell stop orders. When the flood of sell orders came in, I would buy back my short contracts at a lower level. On the trading floor, this was not an uncommon practice and some traders did it quite effectively.
On Sunday night, in all likelihood, a similar event occurred in the Silver Market. The Chart below shows the activity in Silver which has had an enormous 8.3% range in the Holiday, Sunday/Monday/Tuesday trading session. Silver traded from a low of 19.61 to a high of 21.23 and then quickly back to the 20.00 level. Keep in mind that a move of $20 to $21 in Silver is worth $5000 per contract. It is a highly leveraged contract so, if you had a stop-loss order, chance were you may not have been filled near the price of your order.
Now that algorithmic trading has taken over where pit trading used to occur, trading sessions are practically twenty-four hours and depending on the market, liquidity can be excellent. The problem with a market like Silver, and it is a question that should likely be asked, if there isn’t adequate liquidity, like Silver probably didn’t have over the weekend, should it trade practically twenty-four hours a day. I’m sure that if you had a buy stop to cover your shorts in Silver and were filled at a price significantly away from you stop price, you may have an opinion.
Overnight trading sessions tend to have reduced liquidity and particularly in Silver, there is a possibility to suffer significant financial loss in a short period of time. As always, there can be numerous causes for a brief rally of this magnitude, but a combination of short covering and the initiation of new positions based on breaking through the 20.00 level were contributing factors.
For those of you that are interested in trading Silver with the best leverage possible, Silver Futures are for you. For those interested in trading on a smaller scale, SLV (IShares Silver Trust) may be a better route. Although their options contracts are not the most liquid, SLV does provide a fair and reasonably good environment for trading Silver. For those interested in learning more about options trading our Options Guide and Options Trading Syllabus provide a significant amount of options trading information.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.