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.

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