Silver Options Explained
Silver options are option contracts in which the underlying asset is a silver futures contract.
The holder of a silver option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying silver futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Silver Option Exchanges
Silver option contracts are available for trading at New York Mercantile Exchange (NYMEX).
NYMEX Silver option prices are quoted in dollars and cents per ounce and their underlying futures are traded in lots of 5000 troy ounces of silver.
|Exchange & Product Name||Underlying Contract Size||Exercise Style||Option Price Quotes|
|NYMEX Silver Options||5000 oz|
(Full Contract Specs)
|American||Calls | Puts|
Call and Put Options
Options are divided into two classes - calls and puts. Silver call options are purchased by traders who are bullish about silver prices. Traders who believe that silver prices will fall can buy silver put options instead.
Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.
Silver Options vs. Silver FuturesCompared to the outright purchase of the underlying silver futures, silver options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.
Additional LeverageCompared to taking a position on the underlying silver futures outright, the buyer of a silver option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying silver futures.
Limit Potential Losses
As silver options only grant the right but not the obligation to assume the underlying silver futures position, potential losses are limited to only the premium paid to purchase the option.
Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.
Options have a limited lifespan and are subjected to the effects of time decay. The value of a silver option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.
Learn More About Silver Futures & Options Trading
- Silver Futures Basics
- Buying Silver Futures to Profit from a Rise in Silver Prices
- Selling Silver Futures to Profit from a Fall in Silver Prices
- Silver Call Option Trading Basics
- Silver Put Option Trading Basics
- Hedging Against Rising Silver Prices with Silver Futures
- Hedging Against Falling Silver Prices with Silver Futures
How to Start Trading Silver Options
To buy or sell silver options, you need to open a trading account with a broker that handles futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.