(Bloomberg) -- Silver's spectacular rally this week may offer trading opportunities in equities.
Prices spiked more than 16% in the past few days to an almost seven-year high as a resurgence in coronavirus cases, slowing growth and a weak U.S. dollar sparked demand for havens. To strategist Eric Johnston of Cantor Fitzgerald that's a good sign for the Industrial Select Sector SPDR Fund. He recommends a long trade using August call options.
“We think XLI is going to outperform the S&P 500 and Nasdaq-100 going forward and rally on an absolute basis,” he wrote in a note Wednesday, referring to the fund by its ticker.
The iShares Silver Trust has seen a surge in option volume and a four-plus standard deviation move in price. When that happens, near-term upside is limited, according to Susquehanna Financial's Chris Murphy.
“Since 1969, there have been 14 occurrences where the 90‐day returns in silver was greater than four standard deviations,” Murphy said. “On average, prices fall over the subsequent two months before rebounding after three months.”
He recommends deploying protection via near-term collars -- selling an October call to buy a put -- a strategy that offers upside but limits the downside.
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