Buying (Going Long) Silver Futures to Profit from a Rise in Silver Prices

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Contents

Buying (Going Long) Silver Futures to Profit from a Rise in Silver Prices

If you are bullish on silver, you can profit from a rise in silver price by taking up a long position in the silver futures market. You can do so by buying (going long) one or more silver futures contracts at a futures exchange.

Example: Long Silver Futures Trade

You decide to go long one near-month TOCOM Silver Futures contract at the price of JPY 30.23 per gram. Since each TOCOM Silver Futures contract represents 30000 grams of silver, the value of the futures contract is JPY 906,900. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of JPY 108,000 to open the long futures position.

Assuming that a week later, the price of silver rises and correspondingly, the price of silver futures jumps to JPY 33.25 per gram. Each contract is now worth JPY 997,590. So by selling your futures contract now, you can exit your long position in silver futures with a profit of JPY 90,690.

Long Silver Futures Strategy: Buy LOW, Sell HIGH
BUY 30000 grams of silver at JPY 30.23/gm JPY 906,900
SELL 30000 grams of silver at JPY 33.25/gm JPY 997,590
Profit JPY 90,690
Investment (Initial Margin) JPY 108,000
Return on Investment 84%

Margin Requirements & Leverage

In the examples shown above, although silver prices have moved by only 10%, the ROI generated is 84%. This leverage is made possible by the relatively low margin (approximately 12%) required to control a large amount of silver represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Silver Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Silver Call Options to Profit from a Rise in Silver Prices

If you are bullish on silver, you can profit from a rise in silver price by buying (going long) silver call options.

Example: Long Silver Call Option

You observed that the near-month NYMEX Silver futures contract is trading at the price of USD 11.30 per troy ounce. A NYMEX Silver call option with the same expiration month and a nearby strike price of USD 11.00 is being priced at USD 0.7500/oz. Since each underlying NYMEX Silver futures contract represents 5000 troy ounces of silver, the premium you need to pay to own the call option is USD 3,750.

Assuming that by option expiration day, the price of the underlying silver futures has risen by 15% and is now trading at USD 12.99 per troy ounce. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying silver futures at the strike price of USD 11.00. This means that you get to buy the underlying silver at only USD 11.00/oz on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying silver futures at the market price of USD 12.99 per troy ounce, resulting in a gain of USD 1.9900/oz. Since each NYMEX Silver call option covers 5000 troy ounces of silver, gain from the long call position is USD 9,950. Deducting the initial premium of USD 3,750 you paid to buy the call option, your net profit from the long call strategy will come to USD 6,200.

Long Silver Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 12.99/oz – USD 11.00/oz) x 5000 oz
= USD 9,950
Investment = Initial Premium Paid
= USD 3,750
Net Profit = Gain from Option Exercise – Investment
= USD 9,950 – USD 3,750
= USD 6,200
Return on Investment = 165%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the silver option sale will be equal to it’s intrinsic value.

Learn More About Silver Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Gold & Silver Futures Contracts

Gold and silver futures are traded on several exchanges across the globe. These instruments can give investors exposure to gold and silver while only putting up a fraction of the total cost of the contract. Because of this leverage, gold and silver futures are not to be taken lightly and are certainly not appropriate for all investors.

What Exactly is a Gold or Silver Futures Contract?

Futures contracts were first traded in the mid-19th century with the establishment of a central grain market. This central grain market gave farmers the ability to sell their grain for immediate delivery in what is known as the spot market, or they had the option to sell their grain for a certain price for a future delivery date. A futures contract is a legal agreement between the buyer and the seller for the purchase or sale of an asset on a specific date during a specific month.

The purchase and sale of futures contracts is facilitated through a futures exchange and is standardized in terms of quality, quantity, and delivery time, as well as delivery location. The price of a futures contract is not fixed, however, and is constantly in a state of discovery through an auction-like process on exchange trading floors and/or electronic trading platforms. In the case of gold or silver, a futures contract outlines a specific delivery time and place for “good delivery” gold or silver bullion.

Who Uses Futures Contracts?

The use of futures contracts generally falls into two broad categories: hedging and speculative purposes. A hedger uses futures contracts to try and mitigate their price risk in an asset, while a speculator accepts this price risk in order to try and profit from favorable movement in prices. The market needs participation from both hedgers and speculators to function properly.

Hedgers may include producers, portfolio managers and consumers. For example, if a farmer produces corn and is concerned about the per-bushel price of corn falling and thus reducing his potential profit, he or she could sell futures contracts. If a corn farmer sold a futures contract today for delivery in five months at a price of $4.00 per bushel, then if the price of corn falls between now and the delivery date the farmer would lose money on his cash crop but would be offsetting those losses by gains made on the sale of the futures contract.

In other words, if Farmer Joe sold corn futures at $4.00 per bushel and corn prices drop to $3.50 per bushel, the Farmer Joe would have a $.50 profit on each corn future sold that would offset the $.50 loss he is seeing on his corn. By doing this, Farmer Joe has insulated himself from a large drop in the price of corn that could adversely affect his potential income.

On the flip side, however, if farmer Joe sells corn futures contracts at $4.00 per bushel and the price of corn rises to $4.50 per bushel, then Joe will be getting more money for his corn crop but will be losing money on the short futures contract. Hedgers must accept this potential profit loss in order to lock in future prices. The bottom line is that many producers and consumers will give up the potential for additional profit in order to try and protect themselves from the potential for loss. This is how futures contracts may be used to try and mitigate price risk.

Gold & Silver Futures Contract Value

A gold futures contract is for the purchase or sale of 100 troy ounces of .995 minimum percent fine gold. A silver futures contract is for the purchase or sale of 5000 troy ounces of .999 percent minimum fine silver. At today’s prices, therefore, a gold futures contract would be worth approximately $130,300 with gold currently trading at $1,303 per ounce. A silver futures contract would have a value of $103,150 with silver currently trading at $20.63 per ounce. Needless to say, the total contract value will fluctuate as gold and silver prices move up or down.

How Exactly Does a Futures Contract Work?

With a gold or silver futures contract, he or she is entering into an agreement through an exchange to buy or sell the metal at a certain date in the future. The most recognized exchange when it comes to metals trading is the COMEX exchange which is now part of Chicago’s CME Group. To buy or sell a futures contract, one does not need to have the entire amount of the contract value but rather must put up what is known as a margin deposit. A margin deposit is a good-faith deposit to make good on the contract.

The fact that futures contracts only require a small portion of the contract value makes them a leveraged instrument. For example, if a gold contract has a total value of approximately $130,000 at current prices, only a small deposit of about $5940 is needed to buy or sell the contract. In other words, one can control $130,000 worth of gold for less than $6000. This may potentially allow some investors to make a significant return on their investment, but also may cause large losses.

Due to the nature of these vehicles, one’s losses can exceed their account equity. Leverage is a double-edged sword and is not suitable for all investors. Speculators may use these contracts to try and profit from price movement in gold or silver while hedgers may use them to try and mitigate price risk. While you can take physical delivery on a gold or silver futures contract, most futures contracts these days are closed prior to expiration or are cash-settled.

If I Buy A Gold Futures Contract, Do I Own Gold?

This is kind of a tricky question to answer. When purchasing a gold futures contract, you can take delivery on that contract of the physical gold. This process can be lengthy and somewhat complicated, however. One does not have the physical gold in their possession until they take delivery and even then the gold will likely be held in a depository until it is transferred to the location of their choice. Most futures contracts are never delivered upon, and gold and silver are no exception. When looking to buy physical gold, there are easier ways to purchase physical metal.

Gold & Silver Futures FAQs

Why would someone sell a futures contract rather than buy it?

Futures contracts can allow one to potentially capitalize on price movements in the market. The reasons for someone selling a futures contract rather than buying could be they believe that prices are going to come down, or they could be a producer looking to try to hedge their price risk. For example, a jewelry maker whose potential profit may be hurt by falling gold prices could decide to sell gold futures in order to try to mitigate this risk.

Are Gold and Silver Futures Risky?

Trading gold and silver futures contracts involves substantial risk — and trading any futures contract involves substantial risk for that matter. Because of the leveraged nature of these types of investment vehicles, investors have the potential to make large profits but also have the equal potential to suffer large losses. In fact, due to the leverage involved, he or she can lose all of the funds in their account very quickly. One can lose more than all of the funds in his or her account as well. Trading in gold or silver futures contracts is not the same as owning the physical metal that one can wrap their hands around.

Would I be better off trying to time the gold or silver markets and trading them accordingly?

The fact of the matter is that the vast majority of investors are poor market timers. Think of how many professionals are out there today trying to “beat the market.” The majority of these professionals cannot beat the benchmark SP500 index. We are not saying it cannot be done, but for most people we believe this type of mentality is not going to be of benefit. That being said, paper investments such as futures, ETFs or the like do not equal physical metal ownership and do not accomplish the same goals.

What about the gold and silver ratio? Can it be helpful?

The gold and silver ratio is simply the number of ounces of silver that equals the value of one ounce of gold. So, with gold trading at $1,310 per ounce and silver trading at $20.05 per ounce, the gold/silver ratio would be 65.34. Some precious metals investors do monitor this ratio in order to try to get some type of buying advantage. For example, if the price of silver is low relative to the price of gold, one may buy silver coins, rounds or bars rather than gold. On the other hand, if the price of silver is relatively expensive to gold, then one may elect to purchase gold coins or bars. It is simply another tool that attempts to determine relative value.

Is it easier to take delivery of a futures contract rather than buying gold or silver from a dealer?

No. Taking delivery from an exchange on “good delivery” gold or silver is neither a simple nor a cost-efficient process. There are several hoops that must be jumped through in order to do this and in addition to those hoops there are fees and costs involved, as well.

What about hedging my physical metals with futures?

One of the biggest uses of futures contracts is for hedging purposes. Hedging involves the purchase or sale of a contract that can potentially help offset losses in a physical market. For example, if a jeweler is worried about the price of silver going up dramatically and squeezing his or her profits, they could buy a silver futures contract to try to help mitigate this risk. If the price of silver does, in fact, start to rise, then the jeweler would potentially see gains on the long futures contract that may help offset losses he or she is seeing on their profits due to higher silver prices.

Is hedging appropriate for the average physical metals investor out there?

This is very debatable, but, again, due to the nature of futures contracts they are certainly not suitable for all investors. Proper hedging requires a good deal of market knowledge and expertise and is beyond the normal investor’s investment acumen. In addition, if one is buying gold or silver for the long-term, they should be prepared for and accept any declines in prices that may occur.

Why do gold and silver futures move around so much?

Gold and silver are very active, and global markets trade nearly around the clock now. These markets can potentially be affected by many different things such as geopolitical events, central bank action or commentary, outside markets, such as oil or the dollar, and investor risk appetite. The markets are basically in a constant state of price discovery and, therefore, may have periods of quiet price activity and may have periods of very heavy price activity.

Do I need to monitor gold and silver futures prices every day if I own the metals?

This is totally up to you. We believe that physical gold or silver ownership is a long term investment and should be treated accordingly. The markets will have day to day or even second to second fluctuations in price. If you are looking at a long term time horizon, then these fluctuations are not too important in the grand scheme of things. That being said, you can monitor the price of metals on a daily basis if you so choose. The web is full of free resources to follow or track commodity or market prices, including on our gold price and silver price charts.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Good for Beginners!
    Free Education + Free Demo Account!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: