Silver’s parabolic rally a 'seven sigma event’ where ‘YOLO traders’ turned $20,000 into $5 million

NEW YORK (February 10) Silver’s wild ride through $120 per ounce saw short-term crypto-style traders make fortunes, sometimes far outperforming the profits of knowledgeable and experienced commodity lifers, according to Daniel Pavilonis, senior commodities broker at RJO Futures.

In a Friday interview with Kitco News, Pavilonis conducted a postmortem of silver’s recent parabolic rally, and the precipitous decline that ended it – at least for now.

“This, in silver at least, was a six sigma, seven sigma event, and historically that just never happened before,” he said. “I think in terms of how a professional trader may look at these markets, and this is just unprecedented. It's unbelievable. And on the other side of that, you see people that have come in, and maybe look at this like Bitcoin or something of that nature: ‘It's going to go up forever!’ So I think that money started moving into the metals.”

Pavilonis said the difference between the established ‘smart money’ and the all-in newcomers was stark, and they were affecting one another – and the overall market, in unusual ways.

“I thought it was pretty interesting,” he said. “On my book of business, the guys that have been around for a long time, that have been really successful in returns, they didn't have the size on that that some of these other guys had that were just ‘hey, I'm just here to trade the metals, I'm a crypto trader, somebody that's not really generally focused on commodities or commodity trading.’”

“Both sides made money from it, at least from our book,” he added. “But the big money – the astronomical money – came from the guys that were just buying crazy options that were so far out of the money that they were dirt cheap when they bought them, like $100 calls when silver was trading at $39, stuff like that. It's just crazy to buy $100 calls when it's trading at $39, thinking that maybe it's going to go up to $50, maybe it breaks through $50, but it's not going to go parabolic like it did.”

“People would generally think that it's a slow grind higher, like what we saw with gold over the last several years. But this just went parabolic.”

As for the equally dramatic selloff on the 30th, Pavilonis speculated that there may also have been massive short bets from some of the big banks in the market which contributed to deepening it.

“Maybe that's true,” he said. “Maybe the banks are saying that because they want to buy more, and they want it to go higher. Who knows?”

Pavilonis said that the profit-taking and risk-mitigation measures used by experienced traders can seem to work against them in these situations, while the gung-ho YOLO traders can sometimes reap the rewards by going all in.

“The key part of this is that you don't know where the market's going to go, or how high it's going to go, or if it's going to roll over,” he said. “You put on a trade, and you don't know how high it's going to go. The biggest problem was that you go from a full-sized position down to maybe a quarter of the position because it hit your targets.”

“Next thing you know, you wake up in the morning and silver's up 10 bucks,” Pavilonis continued. “You still have a position on, but it's nothing near the size that you had on before. And then, okay, silver's trading at $70… are we looking at the $90 calls now? How do you manage that position? So you're slowly unwinding stuff, or adding some way out-of-the-money calls. But it's just the sizing and the strike prices, because at this point, not very many people at our desk were trading futures as silver got above [$70].”

So as prices rose further and further above where experienced traders could believe in them, they would reduce their position, effectively selling to the speculative traders whose only strategy was often: To the moon!

“The biggest takeaway was that those positions, on the smart money side, were just a lot smaller,” he said. “Whereas the guys where it's trading at $30, $40 and they were buying $100 calls for six months out, and $150 calls, and $130 calls… I don't know if it was a trade where it's meant to get up to those strike prices. Maybe it was more just ‘Hey, if we get 50% of this move here, if silver goes up to $70, or $60…’ They would just keep on adding to it, as the [experienced professional commodity traders] were unwinding and managing positions that were still making money. But not like $20,000 in options turning into $5 million.”

“I can say, after this volatility at the highs, a lot of those guys that made a lot of money, the YOLO traders, gave a lot of it back,” Pavilonis said. “But they still did better than a lot of guys that have been in the business for quite some time.”

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