Silver Futures Trading Basics

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An Introduction To Trading Silver Futures

After gold, silver is the most invested precious metal commodity. For centuries, silver has been used as currency, for jewelry, and as a long term investment option. Various silver-based instruments are available today for trading and investment. These include silver futures, silver options, silver ETFs, or OTC products like mutual funds based on silver. This article discusses silver futures trading—how it works, how it is typically used by investors, and what you need to know before trading.

The Basics

To understand the basics of silver futures trading, let’s begin with an example of a manufacturer of silver medals who has won the contract to provide silver medals for an upcoming sports event. The manufacturer will need 1,000 ounces of silver in six months to manufacture the required medals in time. He checks silver prices and sees that silver is trading today at $10 per ounce. The manufacturer may not be able to purchase the silver today because he doesn’t have the money, he has problems with secure storage or other reasons. Naturally, he is worried about the possible rise in silver prices in the next six months. He wants to protect against any future price rise and wants to lock the purchase price to around $10. The manufacturer can enter into a silver futures contract to solve some of his problems. The contract could be set to expire in six months and at that time guarantee the manufacturer the right to buy silver at $10.1 per ounce. Buying (taking the long position on) a futures contract allows him to lock-in the future price.

On the other hand, an owner of a silver mine expects 1,000 ounces of silver to be produced from her mine in six months. She is worried about the price of silver declining (to below $10 an ounce). The silver mine owner can benefit by selling (taking a short position on) the above-mentioned silver futures contract available today at $10.1. It guarantees that she will have the ability to sell her silver at the set price.

Assume that both these participants enter into a silver futures contract with each other at a fixed price of $10.1 per ounce. At the time of expiry of the contract six months later, the following can occur depending upon the spot price (current market price or CMP) of silver. We will walk through several possible scenarios.

In all the above cases, both the buyer/seller achieves buying/selling silver at their desired price levels.

This is a typical example of hedging—achieving price protection and hence managing the risk using silver futures contracts. Most futures trading is intended for hedging purposes. Additionally, speculation and arbitrage are the other two trading activities which keep the silver futures trading liquid. Speculators take time-bound long/short positions in silver futures to benefit from expected price movements, while arbitrageurs attempt to capitalize on small price differentials that exist in the markets for the short term.

Real World Silver Futures Trading

Although the above example provides a good demo to silver futures trading and hedging usage, in the real world, trading works a bit differently. Silver futures contracts are available for trading on multiple exchanges across the globe with standard specifications. Let’s see how silver trading works on the Comex Exchange (part of the Chicago Mercantile Exchange (CME) group).

The Comex Exchange offers a standard silver futures contract for trading in three variants classified by the number of troy ounces of silver (1 troy ounce is 31.1 grams).

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  • full(5,000 troy ounces of silver)
  • miNY (2,500 troy ounces)
  • micro (1,000 troy ounces)

A price quote of $15.7 for a full silver contract (worth 5,000 troy ounces) will be of total contract value of $15.7 x 5,000 = $78,500.

Futures trading is available on leverage (i.e., it allows a trader to take a position which is multiple times the amount of the available capital). A full silver futures contract requires a fixed price margin amount of $12,375. It means that one needs to maintain a margin of only $12,375 (instead of the actual cost of $78,500 in the above example) to take one position in a full silver futures contract.

Since the full futures contract margin amount of $12,375 may still be higher than some traders are comfortable with, the miNY contracts and micro contracts are available at lower margins in equivalent proportions. The miNY contract (half the size of the full contract) requires a margin of $6,187.50 and the micro contract (one-fifth the size of a full contract) requires a margin of $2,475.

Each contract is backed by physical refined silver (bars) which is assayed for 0.9999 fineness and stamped and serialized by an exchange-listed and approved refiner.

Settlement Process for Silver Futures

Most traders (especially short term traders) usually aren’t concerned about delivery mechanisms. They square off their long/short positions in silver futures in time prior to expiry and benefit by cash settlement.

The ones who hold their positions to expiry will either receive or deliver (based on if they are the buyer or seller) a 5,000-oz. COMEX silver warrant for a full-size silver future based on their long or short futures positions, respectively. One warrant entitles the holder the ownership of equivalent bars of silver in the designated depositories.

In the case of miNY (2,500-ounce) and micro (1,000-ounce) contracts, the trader either receives or deposits Accumulated Certificate of Exchange (ACE), which represents 50 percent and 20 percent ownership respectively, of a standard full-size silver warrant. The holder may accumulate ACE’s (two for miNY or five for micro) to get a 5,000-ounce COMEX silver warrant.

Role of the Exchange in Silver Futures Trading

Forward trading in silver has been in existence for centuries. In its simplest form, it is just two individuals agreeing on a future price of silver and promising to settle the trade on a set expiry date. However, forward trading is not standard. It is therefore full of counterparty default risk. (Related: What Is the Difference Between Forward and Futures Contracts?)

Dealing in silver futures through an exchange provides the following:

  • Standardization for trading products (like the size designations of full, miNY or micro silver contracts)
  • A secure and regulated marketplace for the buyer and seller to interact
  • Protection from a counterparty risk
  • An efficient price discovery mechanism
  • Future date listing for 60 months forward dates, which enables the establishment of a forward price curve and hence efficient price discovery
  • Speculation and arbitrage opportunities that require no mandatory holding of physical silver by the trader, yet offer the opportunity to benefit from price differentials
  • Taking short positions, both for hedging and trading purposes
  • Sufficiently long hours for trading (up to 22 hours for silver futures), giving ample opportunities to trade

Market Participants in the Silver Futures Market

Silver has been an established precious metal in dual streams:

• It is a precious metal for investment

• It has industrial and commercial uses in many products

This makes silver a commodity of high interest for a variety of market participants who actively trade silver futures for hedging or price protection. The major players in the silver futures market include:

Silver Futures Trading Basics

Silver futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of silver (eg. 30000 grams) at a predetermined price on a future delivery date.

Some Facts about Silver

Silver is a soft, shiny and heavy metallic element with a brilliant white luster. A very ductile and malleable metal, its thermal and electrical conductivity is the highest of all known metals.

Besides being used as a store of value, other main uses of silver include applications in areas such as electronics, photography and as antiseptics. [Click here to learn about the various uses of Silver. ]

Silver Futures Exchanges

You can trade Silver futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Silver futures prices are quoted in dollars and cents per ounce and are traded in lot sizes of 5000 troy ounces .

TOCOM Silver futures are traded in units of 30000 grams (964.53 troy ounces) and contract prices are quoted in yen per gram.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Silver Futures
(Price Quotes)
SI 5000 troy ounces
(Full Contract Spec)
USD 6,400 (approx. 11%)
(Latest Margin Info)
TOCOM Silver Futures
(Price Quotes)
30000 grams
(Full Contract Spec)
JPY 108,000 (approx. 12%)
(Latest Margin Info)

Silver Futures Trading Basics

Consumers and producers of silver can manage silver price risk by purchasing and selling silver futures. Silver producers can employ a short hedge to lock in a selling price for the silver they produce while businesses that require silver can utilize a long hedge to secure a purchase price for the commodity they need.

Silver futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable silver price movement. Speculators buy silver futures when they believe that silver prices will go up. Conversely, they will sell silver futures when they think that silver prices will fall.

Learn More About Silver Futures & Options Trading

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What are Silver Futures?

Precious metals have been used for years and are considered integral components of an investment portfolio today. Silver, while not as popular as gold when it comes to investments, is actually a very practical and smart investment option, thanks to its limited supply and unprecedented demand from various industries across the globe. Silver futures are considered a good way to invest in this versatile metal and a large number of people are slowly opening up to the idea of silver futures.

What are Silver Futures?

Futures, in the trading world refers to a scheme in which a commodity transaction is executed on a particular day but the product is delivered only in the future, on a date which has been agreed upon by both parties involved. It essentially means that an agreement is entered into on a specific date but the buyer can take physical delivery of the product only after a specific period. Silver Futures refers to a trade in silver which follows this format wherein an initial payment is made and an agreement signed, with the final delivery scheduled on the date in the agreement.

Silver Futures are based on speculation and there is an element of risk involved in them. For example, Mr. Ram decides to participate in this trade, choosing to buy 5 kg of silver from the futures market. He enters into an agreement to pay Rs 25,000 per kg, taking delivery in June that year, three months after signing the agreement. In June, he takes delivery of 5 kg silver when the market prices are just under RS 24,000, which means that he has incurred a loss of Rs 1,000 per kg at current prices.

Advantages of trading Silver Futures

Some of the advantages of silver futures are mentioned below.

  • A buyer will not have to spend additional on finding an immediate storage facility, as the physical delivery will take place only in the future.
  • While the agreement is signed on a particular date, a buyer can get additional time to make final payments to settle the amount.
  • An individual has the provision to short sell his/her silver.
  • While not completely liquid, there is sufficient liquidity on offer.

Risks associated with Silver Futures

Trading in silver futures is not risk free, with some of the risks mentioned below.

  • There is a probability for default risk during such trade.
  • Silver futures can be volatile, with market crashes a harsh reality.
  • Silver prices can fluctuate during the period of a trade and an investor can risk losing a portion of his/her investment.

Expiry of Silver Futures

Silver futures are dated instruments which have an expiry date and an investor should keep this in mind before spending his/her money.

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