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

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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

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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. ]

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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. ]

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. ]

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. ]

How To Buy Silver Options

Buy silver options to attain a position in silver for less capital than buying physical silver or silver futures. Silver options are available in the U.S. through the Chicago Mercantile Exchange (CME), so if you’ve wondered how to invest silver, here’s a shorter-term and less capital intensive way to do it.

How to Invest in Silver: Calls and Puts

Options allow traders to profit whether the price of silver rises or falls. Believe the price of silver will rise? Buy a call option. A silver call option gives the right, but not the obligation, to buy silver at a specific price for a certain amount of time (before expiry). The price you can buy silver at is called the strike price. If the price of silver rises above your strike price before the option expires, you make a profit. If the price of silver is below your strike price, you lose the amount of money you paid for the option, called the premium. (See “Options Basics: How to Pick the Right Strike Price.”)

Put options give the right, but not the obligation, to sell silver at a specific price (strike price) for a certain amount of time. If the price of silver falls below the strike price, you reap a profit of the difference between the strike price and current silver price (approximately). If at expiry the price of silver is above the strike price, your option expires worthless and you lose the premium you paid for the option.

Option prices are also based on ‘Greeks,’ variables which affect the price of the option.

It is not necessary to hold your option till expiry. Sell the put or call before expiry to lock in a profit or minimize a loss.

Silver Options Specifications

Silver options are cleared through the CME, trading under the symbol SO. The value of the options is tied to the price of silver futures, which also trade on the CME. Forty strike prices are offered, in $0.25 increments above the below the the current silver price. The further the strike price from the current silver price, the cheaper the premium paid for the option, but the less chance there is that the option will be profitable before expiry. There are 60 expiry times to choose from, ranging from short-term to long-term.

Each option contract controls 5,000 ounces of silver. If the cost of an option is $0.20, then the amount paid for the option is $0.20 x 5,000 = $1,000, plus commissions. For comparison, buying a silver futures contract which controls 5,000 ounces requires $9,900 in initial margin. Buying physical silver requires the full cash outlay for each ounce purchased.

Options trading requires a margin brokerage account which allows trading in options. Interactive Brokers, TD Ameritrade and a number of other brokers provide this service.

Silver options prices and volume are found in the Quotes section of the CME website, or through the trading platform provided by an options broker.

The Bottom Line

Call and puts provide traders with a less capital intensive way to profit from silver uptrends or downtrends respectively. If the option expires worthless, the amount paid (premium) for the option is lost; risk is limited to this cost. Trading options requires a margin brokerage account with access to options.

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    Best Binary Options Broker 2020!
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