Affected by mine production, industrial demand and the global economy, the price of silver can be volatile beyond what some consider a comfortable amount of risk.

The metals industry and other commercial market participants (e.g. mining companies, refineries, banks, firms, advisors, and speculative traders) have learned to cope with this price uncertainty by hedging against adverse price movements.

Investors should note that trading in silver futures contracts is not the same as owning the physical metal. So what are silver futures, and what are the benefits of adding them to your portfolio?

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What are silver futures?

According to JM Bullion, futures contracts were first traded in the mid-19th century at a central grain market which gave farmers the ability to sell their grain for immediate delivery (spot market) or for a certain price for a future delivery date (futures contract). So, 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.

Specifically in silver, futures contracts are firm commitments to make or accept delivery of a specified quantity or quality of silver during a specific month at a price agreed upon at the time the commitment is made. A silver futures contract outlines a specific delivery time and place for “good delivery” silver bullion.

Most traders (especially short term traders) usually aren’t concerned about delivery in silver futures. They settle their long or short positions before expiry and benefit with a cash settlement. Approximately 1 percent of silver futures contracts traded each year result in delivery of the underlying commodities.

Investors who wait for their silver futures to mature will either receive or deliver a 5,000 troy ounce COMEX silver warrant for a full-sized silver future, depending if they are the buyer or the seller. One warrant entitles the holder the ownership of equivalent bars of silver in the designated depositories including Brinks, HSBC, Bank USA, Manfra Tordella & Brookes, Scotia Mocatta, Delaware Depository Service Company, and J.P. Morgan Chase.

Silver Future Options

Unlike future contracts, future options are contracts in which the underlying asset is a silver futures contract.

The holder of a silver option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying silver futures at the strike price. Compared to taking a position on the underlying silver futures outright, the buyer of a silver option gains additional leverage because they only grant the right but not the obligation to assume the underlying silver futures position. Therefore, potential losses are limited.

Using options alone or in combination with futures allows investors a wide range of strategies for a specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

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Why Silver Futures?

Silver has appeal as an investable asset for several reasons. First, if investors lose faith in currencies – specifically, the US dollar – demand for silver often rises with gold. If gold is too expensive, silver can be a relatively inexpensive option for investors.

Futures also offer a limit of potential loss to the buyer, which attracts potential hedgers. Hedgers such as producers, portfolio managers or consumers often use futures to mitigate price risk, protect themselves from inflation, and reap the rewards from favorable price movements. On the other hand, speculative investors can use silver futures to gain exposure to silver while only putting up a fraction of the total cost for the contract.

Many producers and consumers also choose to sacrifice some potential for additional profit in order to try and protect themselves from the potential for loss. If this wish to mitigate risk, they’ll often use future contracts. For example, if silver miners are concerned about the price of silver falling and reducing their potential profit, they could sell futures contracts. They would agree to deliver a certain amount and grade of silver in five months for a fixed price. If the silver price between now and the delivery date fell, the miner would lose profit but would offset those losses by gains made on the futures contract sale. However, if the price rises, then the miner will make a higher profit for his product, but lose money on the futures contract.

It should be said that futures also have the equal potential to suffer large losses. Due to the leverage involved, an investor can lose funds in their account quickly. However, by using options in combination with futures contracts, investors may be able to control their desired risk profile, time horizon, or cost consideration.

What markets are futures traded on?

Futures contracts are purchased at exchanges, focusing on a standardization of quality, quantity, delivery time, and delivery location.

Dealing in silver futures through an exchange provides standardization for trading products and a secure and regulated marketplace for the buyer and seller to interact. It also allows for an investor to take short positions for hedging and trading.

Silver futures contracts are traded under the ticker symbol SI in a few places. Notably, they are traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open outcry. The New York Mercantile Exchange merged with the Commodity Exchange in 1994, becoming the world’s largest physical commodity futures exchange.

Contracts at COMEX are traded in units of 1,000 (micro), 2,500 (miNY) and 5,000 (full) troy ounces of the precious metal and are priced in US currency (dollars and cents) per troy ounce. One  troy ounce is 31.1 grams. So, a price quote of $14 for a full silver contract (5,000 troy ounces) would yield a total contract value of $70,000.

Silver futures are also traded electronically through the Chicago Board of Trade (eCBOT), the Indian National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM). TOCOM silver futures are traded in units of 30000 grams (964.53 troy ounces) and contract prices are quoted in yen per gram.

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How to Trade Silver Futures

Like every commodity, silver has its own ticker symbol, contract value, and margin requirements. However, silver futures are traded at specific times, so investors should research when a pit session starts and ends if they want to trade during a high-volume time (yes, some are still traded in pits). Additionally, there are various costs involved in purchasing silver through the futures markets, depending on the agreement – so look closely.

There are two stances to take in trading: a long and a short. A short sale is when someone agrees to sell silver in the future. Without someone agreeing to sell in the future (the short), nobody could agree to buy in the future (the long). The short seller is hoping that the price of silver will go down and when the contract expires, they will be paid the difference. There is a chance that they may need to deliver the physical silver, in which case they would need to buy it.

Trading in COMEX Division silver futures is conducted for delivery during the current calendar month, the next two calendar months, any January, March, May, and September thereafter falling within a 23-month period, and any July and December falling within a 60-month period, beginning with the current month.

Options are traded for the nearest five of the following contract months: March, May, July, September, and December. January, February, April, June, August, October, and November are listed for trading for a period of two months. In addition, a 24-month option is added on a July to December cycle. Options can be exercised at any time up to expiration.

When investing in silver futures, the best thing for investors to keep in mind is that they have a few options to adjust their risk and leverage. In addition to buying futures contracts or options, you can buy ETFs that track futures. Outside of the futures realm, investors have the choice to hold the physical metal, ETFs, equity options and stocks.

Because of the potential leverage for investors, silver futures are a great way to mitigate risk and get bigger gains – but they also hold the potential for big losses, so they should be paid due diligence.


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