A senior commodities broker has observed that during silver's dramatic surge past $120 per ounce, short-term traders amassed enormous fortunes, sometimes far exceeding the profits of seasoned, knowledgeable veterans.

Daniel Pavionis of RJO Futures recently reflected on silver's parabolic rise and its subsequent sharp decline, describing the event as historically unprecedented. He stated this was at least a six or seven-sigma event for silver, something that has never happened before. From the perspective of how professional traders view these markets, it was unbelievable. Conversely, some new entrants viewed silver as an asset that would rise indefinitely, leading to significant capital flowing into the metals market.

A six-sigma event is a statistical anomaly with a probability of less than 3.4 in a million, indicating an extreme deviation from normal volatility. A seven-sigma event is even rarer, with odds below 2 in a billion, making it theoretically almost impossible.

Pavionis highlighted a stark contrast between sophisticated "smart money" and fully committed newcomers, noting they influence each other and the market in unusual ways. He found it interesting that, among his clients, the long-term successful traders held smaller position sizes compared to some newcomers who specifically entered to trade metals without a usual focus on commodities.

Both groups profited, he added, but the truly astronomical gains came from those who purchased extremely cheap, far out-of-the-money call options. For example, buying $100 strike calls when silver was trading at $39 was considered insane. While one might hope for a rise to $50, no one anticipated such a parabolic move. People typically expect a slow grind upwards, similar to gold in recent years, but this time the price action was purely parabolic.

Regarding the sharp sell-off, Pavionis speculated that substantial short positions from large banks may have exacerbated the downturn's depth. He suggested banks might have been talking their book, hoping to buy more at higher prices.

In these situations, the profit-taking and risk-hedging strategies used by experienced traders seemed to work against them. Meanwhile, traders embracing a "YOLO" (you only live once) philosophy were sometimes rewarded for their all-in bets. The key challenge, Pavionis explained, is not knowing how high a market will go or if it will reverse. A trader might scale back a full position to just a quarter after hitting a target, only to wake up and find silver has surged another $10. Managing such a position becomes difficult, leading to gradual position reduction or adding more deep out-of-the-money calls. The issue becomes one of position size and strike price selection, as very few were trading futures once silver broke past $70.

Consequently, as prices climbed beyond levels veterans found credible, they reduced exposure, effectively selling their chips to speculators whose sole strategy was often "to the moon." The major takeaway, Pavionis said, was the vastly smaller position sizes on the "smart money" side. The other group, buying $100, $130, or $150 strike calls months out when silver was at $30 or $40, may not have genuinely expected prices to reach those levels. Their strategy was perhaps more about capturing half the move, continuously adding size if silver reached $60 or $70. Meanwhile, the professional commodity traders were scaling back and managing still-profitable positions. The scale of returns, however, was worlds apart—nothing like the miracle of a $20,000 option turning into $5 million.

Following the extreme volatility at the highs, many YOLO traders gave back a significant portion of their profits, Pavionis noted. Even so, their overall performance still surpassed that of numerous veterans who had been active in the market for years.