Affected by mine production, industrial demand and the global economy, the price of silver can 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. One of the main risk management tools that investors use include future contracts and options.

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?

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.

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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.

Why Silver Futures?

Silver has appeal as an investable asset for several reasons. First, if inv