Even if you are not involved directly in the metals market, you have heard of the move in silver over the last six months. The move was historic in nature and came on the back of what had already been one of the strongest moves seen in the metal. Over this period, traders have seen both a 227% increase to a high above $120 and a 47% drawdown to a low near $65 before it has settled down a bit. CME Group raised margins several times over this period, particularly in 2026, reflecting both the increased dollar value of the contract as well as the heightened volatility in the asset. The silver market is not one for the faint of heart.  

While there was likely some speculation in the market, the key driver initially came from the supply/demand imbalance that has afflicted the silver market for some time. The February 12, 2026, edition of MoneyMetals.com highlighted how the supply and demand picture looks in 2026, following several similar years:

“The silver market is projected to run its sixth straight structural supply deficit in 2026 as investment demand remains high.

Based on preliminary data compiled by the Silver Institute, silver demand outstripped supply by about 95 million ounces last year, leading to the fifth straight market deficit. Including the projected 2025 shortfall, the 5-year market deficit will climb above 800 million ounces, an entire year of mining output.

The Silver Institute projects a deficit of around 67 million ounces in 2026.

This underscores the key dynamic driving the silver market right now – there simply isn’t enough metal.”

As over 70% of the world’s silver supply is a byproduct of mining zinc, lead and copper and not mined directly, this slows the market response to higher prices. Said another way, silver supply is mostly inelastic in the short term and means the metal is less sensitive to the commodity market adage “the cure for high prices is high prices.” Demand, on the other hand, has been growing considerably, primarily driven by Asia. In India, where demand for silver jewelry is high and ratcheted higher in the recent Diwali holiday season on the back of higher gold prices. Additionally, as of January 1, the Indian government allowed silver to be used as collateral for loans meaning even more silver was demanded by individuals. Add to this the industrial demand from China with silver being used in solar panels and data centers among other large uses. Since silver is a small piece of the overall cost, even the demand from the industrial players is relatively inelastic in the short term. When price-insensitive demand meets fixed supply, markets get price moves like they have seen the last 6 months.

The heightened demand in the silver spot market is most seen by looking at the futures curve over the next 10 years. The blue line above is the futures curve from six months ago, before the 200%+ rally. You can see the normal contango in the curve with longer dated contracts trading at a considerable premium to spot. In fact, the futures market implied the long run growing demand rising from the $35 spot rate to $65 in 10 years. Fast forward to the current curve and one sees the same $65 price in 10 years’ time. The biggest change is that the current rate is $77 in spot as companies, individuals and traders demanded a premium to be long silver spot versus being willing to wait. This backwardation in the futures curve is not typical and is indicative that it was spot demand driving price and less speculation in the futures market. 

Traders now have to step back and look at the charts and attempt to discern a path forward after the heightened volatility. For me, this means turning to the daily Ichimoku charts. I see that the Ichimoku cloud, depicting the rising level from which longs and shorts traded over the last several months still points to a move higher as I look out over the next month or so. The RSI has pulled back from the extremely overbought readings in December and January and now sits in the middle of the range. Importantly as well, the MACD looks poised to turn higher and cross over, another possibly bullish sign looking forward. In spite of the technical damage done by a 47% drop, the move higher was so extreme that the drop primarily worked off extremely overbought conditions and did not change the overall trend of the futures market. This should not surprise us knowing the structural shortage of supply in the market.

Now that I have an idea of a directional view, it is important to get our view of volatility so I can determine the best implementation of our idea. The top chart shows the CVOL Index for Silver as far back as I can go. With historic moves in the underlying, I want to get as long a picture on volatility as I can. I see that CVOL hit the highest level in its history at 125 in January. Even with a sharp pullback to a level of around 75, it is still at one of the highest levels this century, matched only by the Covid spike and the start of the Russian-Ukrainian war. The middle chart shows the skew ratio, or the relative demand for calls vs. puts. This ratio has been remarkably constant throughout the volatility in the underlying. The current level of 1.25 is in line with the average over the entire period and reflects a premium for upside strikes, but not a premium that is extreme by historical standards. Finally, the bottom chart shows convexity or the relative demand for out-of-the-money options vs. at-the-money options. Again, while this fell to 1 in January, suggesting no premium for out-of-the-money options, I should not be surprised. With at-the-money volatility at all-time highs, every option on the curve was trading at the same level. As volatility has fallen, there is a small premium for out-of-the-money but it is more muted and this is fully expected.

What sort of range might I expect over the coming month or so? For this I use the bollinger bands which take the moving average and create a range based on two standard deviations on either side. This is a good first-order expectation for the type of range I might expect. I see that currently looking forward, the range is 63-116, quite wide given the high volatility and given the fact the $43 range is larger than what the price alone was not too long ago. This speaks to the uncertainty market participants have for the silver outlook.

Putting this all together, I have the following points:

1. Silver is still expected to have a wide range going forward
2. Silver is trading below its moving average, and the technical charts point to higher levels
3. Supply and demand support this bullish view of the underlying
4. Backwardation in the futures market also supports a bullish view
5. Implied volatility is at some of the highest levels in history, with call strikes trading higher than the at-the-money and put strikes

Even with the uncertainty, simply buying calls with a bullish bias would not make sense given the high levels of implied volatility. That said, selling options with high volatility, but wide ranges still expected, not only seems risky, but is likely too risky for most traders’ risk budgets. This all points to a spread, particularly a call butterfly. The call butterfly allows traders to have a bullish directional view. It sells the highest volatility on the curve, the upside calls, but covers the tail risk by buying even further out-of-the-money calls. With convexity not extreme, those higher strike calls do not trade at much of a premium. The bottom strike is set just above current futures level. The middle strike is set slightly above the moving average, forecasting the futures may trade up to the middle of the range and pause before a rapid move higher. The final leg of the butterfly is set near the top of the range, because if I go through there, I likely should give up on the idea of a range trade. I chose an expiration that is about a month out to get a wider range but not be too far out where it becomes less predictive that I can stay in the range. The SOJ6 expiration is 38 days out and gives time for the idea to come to fruition.

The SOJ6 80-90-100 call butterfly costs $1.45, the maximum risk to traders, which happens if futures are below $80 or above $100 at expiration. The maximum potential gain comes if futures are at $90 at expiration. If there, traders would make the difference between the strikes of $10 less the premium spent so a net of $8.55. Therefore, the maximum reward to risk in this idea is 8.55 to 1.45 or 5.9 to 1, a very attractive and asymmetric reward to risk that I can achieve by virtue of high implied volatility and high call skew.

To achieve this high reward to risk, traders need both a positive drift/move higher and a dampening of volatility going forward ideally. In theory, volatility doesn’t have to fall-off but that likely means traders' risk appetite on both sides of the butterfly would get tested.

The nice thing about this trade is the risk is defined up front. It can be daunting to think about entering a market that has had historic moves and where several internal indicators still point to extreme stress and uncertainty. Finding the defined reward to risk can be a trader’s best friend in these uncertain times, and CME Group gives traders the tools and the products to express these views.

Good luck trading!

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