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.
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.