When you are looking to make an investment in precious metals at a lower capital point than you would if you were buying the metal outright, then you should look at silver options. In the US, silver binary options are traded on the Chicago Mercantile Exchange (CME), which is the best way for retail investors to gain exposure to this market segment with a relatively low capital outlay. Binary options are particularly popular because they allow traders to profit, regardless of the direction the price of silver takes.
Do you believe that the price of silver is bound to rise soon? Then, you should buy a Call option on the asset. A Call option on silver gives you the right – but not an obligation – to buy the metal at a pre-agreed price during a specified period of time, before the expiry of the option. This price is referred to as the strike price. If you have bought a Call option and the price of the metal rises above the strike price during the life of the contract, you earn a profit. On the other hand, if the price of silver sinks to a level that is lower than the strike price, you will lose your initial investment in the options contract, also known as the premium.
The other type of binary options contract is the Put option. It gives you the right – but no obligation – to sell silver for a particular amount of time at a fixed strike price. What should happen for you to earn a profit on a Put option is for the price of silver to drop below the contract’s strike price at the expiry of the trade. The approximate amount of profit you stand to earn will be clearly defined on the broker’s trading platform and in many cases, this can be as high as 90 percent. If the put option expires with the current price of silver being higher than the strike price, you lose your initial investment.
In options trading, every silver options contract is worth 5,000 ounces of the precious metal. That is, if an option costs $0.20, every options contract is worth $0.20 x 5,000 which is $1,000 plus commissions. In comparison, a silver futures contract controlling 5,000 ounces will cost a trader $9,900 in initial capital outlay. Buying physical silver is even more expensive since it requires that the buyer pays the full cash value of every ounce they purchase.
The Basics of Silver Futures
Both producers and consumers of this precious metal can manage price risk of the commodity by buying and selling futures contracts. Producers of silver should be able to utilize a short hedge to ensure that they have locked in the best selling price for the silver that they produce. On the other hand, businesses and industries that require silver for their manufacturing processes can use a long hedge to ensure they get a fair price for the metal.
Silver futures contracts are also popular with speculative traders who take on the risk that hedgers are trying to avoid in hopes of profiting from favorable movements in silver prices. Such speculators will purchase silver futures contracts when they believe that the prices of the metal are likely to go up. Speculators will, on the other hand, sell their futures contracts if they think that prices are likely to drop.
Silver Futures vs. Silver Options
Although silver futures offer certain advantages to speculators, producers and industrial traders, silver options are a better choice for some investors. This is because options offer certain advantages such as leverage and the limitation of potential losses. Below, we look at some of these advantages:
- Additional Leverage: When you compare a silver option to buying a futures contract outright, a trader who buys a silver option benefits from additional leverage because the premium they need to pay is almost always lower than the margin required to purchase silver futures.
- Limiting Of Potential Losses: Because silver options only grant the buyer the right but not an obligation to assume the futures position, the potential amount the trader can lose on an unsuccessful trade is limited to the price they paid to purchase the option only.
- Flexibility: Through silver binary options alone, or by having a combined investment of options and futures contracts, it is possible for a trader to implement a wide variety of potentially profitable strategies that cater to their risk profile, cost considerations, investment timeframes and the prevailing outlook on market volatility.
The Final Word
In order to trade silver options, you need to have a margin brokerage account that has options trading among its options. There are several major brokers that accept US traders and who offer this type of account. The volumes and prices of silver binary trading are displayed on the Quotes page of the CME website. Most brokers who offer silver options also provide this information on their trading platforms.