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Silver Futures

For those of you who have never traded futures before, may I suggest you have a look at another of my sites which explains the background to futures trading in general, and the issues you need to be aware of as a silver futures trader. Silver futures trading is all about speculation, and hedging where many investors use the market to hedge against other positions in gold or gold stocks, or even against other correlated positions in other markets. With silver futures you are not buying silver physically, you are not investing in silver bullion, silver bullion coins or coins of great rarity and value. You are simply trading in positions either to make money on whether the price of silver increases or decreases over the duration of the contract, or alternatively to cover positions in other markets. Whilst the contract specifies the amount of silver being traded, it is rarely delivered at expiry of the contract, either because the holder has purchased an opposite contract to cancel out the position, or alternatively the contract is a cash settlement contract. Naturally some buyers do indeed enter the market for purchasing the commodity for onward supply.

Silver futures are traded on several of the worlds major exchanges, with the bulk of trades going through London, Tokyo, Singapore and Sydney, and in US, through COMEX ( New York Mercantile Comex Exchange), the New York Mercantile Exchange ( NYMEX) and the precious metals department of the Chicago Board of Trade (CBOT). Because the market is tightly regulated and the contracts are traded through central exchanges, trading in silver futures offers more leverage, flexibility and financial integrity than in trading the commodities themselves. In common with other futures markets you are able to trade on margin, with leveraged positions which offers both advantages and disadvantages which I have explained in detail elsewhere, and naturally you have the ability to go both long and short. All risks of default are covered by the clearing house, which means that the exchange acts as a buyer to every seller and a seller to every buyer.

In terms of the silver contracts available and how they are quoted, this does vary from exchange to exchange, but if we take the US market as one of the largest and take a look at COMEX which is one of the biggest. The contract size at COMEX is 5000 troy ounces, and all contracts are traded in US dollars and cents, with contracts traded both in the open outcry trading pit, as well as electronically. So to take a simple example, if silver is trading at $10 per ounce, then one silver futures contract has a value of $50,000 US dollars ( $10 x 5000). The minimum tick size is 0.5 cents, equivalent to $25 per contract, so if the spot silver price moved from $10 to $11, your profit would be 100/0.5 x $25 = $5000 ( or 1$ x 5000 ). The ticker symbol for silver futures is SI. Silver futures on the CBOT exchange are identical, with the ticker symbol ZI, except that they also offer a mini-futures contract which is one fifth the size at 1000 troy ounces, with a tick size of 0.001 or $1 per contract. The ticker symbol for these is YI. Naturally if you are new to silver futures trading, I would suggest that you start with the mini futures contract on the CBOT exchange and learn to trade using small contract sizes, before moving to full sized lots. The principle reason for this is that the silver futures market can be extremely volatile both during the day and overnight, with prices opening gapped up or gapped down.

Now to say that gains and losses in trading futures are a result of the price change would be accurate, but it does not explain the whole process. In futures trading as with options, we are trading in volatility, not in price movements, and when coupled with leverage and margin, this provides a powerful cocktail of profit and loss which is magnified. I cannot stress enough, that before you enter the world of futures trading, you must have a complete understanding of the risks involved, and indeed many futures brokers will not accept you as a client, unless you can prove that you have several years of trading and investing experience. All the rules and regulations have been tightened in this respect, as many novice traders have lost considerable sums trading in futures and options in the last few years, due to lax checking by the various brokers.