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THE WINDY CITY TRADER
P.O. Box 1673, Chicago, Illinois
(November 25, 1997) METALS: We really cannot say too much about gold. The silver market is experiencing an unusual phenomenon. The market has rallied over 70¢ the past few weeks. The reasoning is that there is an artificial tight supply situation. There is an unusually high amount of silver contracts being held for December. If you added up the amount of ounces (5000 per contract) in open interest, it actually exceeds the amount of physical silver in the Comex warehouse. However, a short squeeze implies that all traders holding these contracts will take delivery. In reality, only a small percentage of silver contracts (1-2%) actually result in physical delivery. During the next week as these contracts are liquidated, we expect a major drop of 50¢-60¢. We have a short-term strategy to try to possibly take advantage of this. The January $500 put option (expires December 12) costs about $100 (as of this writing). We would like to purchase this put. If our assumption is correct, silver could break quickly and push this market down to $4.75 to $4.80. This would take the put option to 20¢-25¢ ($1,000- $1,250 at 50¢ per penny move).
Stephen Connell and William Frejlich
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