Gold and Silver Options Expiry March 28, 2011 - Expect Volatility

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I am aware that the Comex options expiry dates for the precious metals usually means a lot of volatility; mainly meaning for whatever reason that the precious metals usually make unusual diving moves downwards for the day, driven by an unseen force.Now, some pundits say that large traders such as hedge funds deliberately manipulate the pricing in order to capture gains and/or to prevent losses prior to the expiry.

Whatever the reasons, here is a worthwhile explanation that touches upon why there is volatility close to options expiry dates.Essentially the dealers of these options, following the trend and having to balance the trades, end up leveraging the move and increasing the volatility:

Since the dealers are short gamma, they must buy stock as the stock moves higher and sell stock as it moves lower (meaning that, in order to remain delta neutral, they must exaggerate volatility).

As the silver metal is the leader of this recent precious metals bull run, the author did a back check for the last few months using the SLV Silver ETF as a proxy for the silver price.The chart of SLV since September 2010 is as follows:

click to enlarge

Looking at the chart above, the author has circled the previous precious metals options expiry dates.Yes, the circles do seem to mark the days that the silver prices do act a little untoward during the dates of the precious metals options expiry. The moves are mostly downwards and exaggerated for the day, with recovery following the prevailing trend the following day.Here is a link for the upcoming precious metals options expiry dates for 2011.

The next date for the precious metals options expiry is Monday, March 28th, 2011; the reader is advised to be careful as the trading that day for precious metals and precious metals stocks will be volatile.The author is preparing for that day by taking profits where possible, on the larger cap precious metals stocks, and selling back to core positions prior to the date.I don't believe the smaller cap Junior miners will be affected as much, but I will be positioned to buy should the value proposition appear.The author is a believer in the fundamental drivers behind the running of the precious metals bull market.

The author holds positions in gold and silver miners such as Goldcorp (GG), Franco Nevada (FNNVF.PK), Silvermex (GGCRF.PK), US Silver (USSIF.PK), Great Basin Gold (GBG) and exploration Juniors such as Victoria Gold (VITFF.PK), Canadian Zinc (CZICF.PK), Atac Resouces (ATADF.PK) and Almaden Resources (AAU).

Disclosure: I am long GG, FNNVF.PK, USSIF.PK, GGCRF.PK, GBG, CZICF.PK, ATADF