Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options and A Trader’s First Book On Commodities, are available from FT Press.
Speculating in silver
I want to speculate in silver, but I don’t have the margin or the risk tolerance for futures. Is there a better way?
Speculation in silver is challenging in many ways, and recent volatility has magnified the risks. There are essentially four ways to speculate in silver prices: exchange traded funds (Etfs), foreign exchange, futures (including options on futures), and bullion. However, there are few I would feel comfortable recommending to most retail traders, simply because they have certain drawbacks. Nonetheless, I’d like to provide a quick overview of the realities and allow you to decide for yourself which might be best for you. One thing is for sure: there is no such thing as easy money when it comes to trading silver.
Silver Etfs: The popularity of Etfs is soaring, and along with it has come the advent of specialized Etfs aimed at hot commodity markets such as gold and silver. Some silver Etfs are made up of silver mining companies rather than the shiny metal itself and subject to price changes tied to company, industry, or market-specific risks. Thus, they aren’t a pure speculation on silver prices. So unless your interest lies with the miners themselves, this seems like a relatively unappealing option for a silver trader.
But there are silver Etfs based solely on the price of the metal, such as the popular Slv; Slv shares are backed by 10 ounces of silver. Buy & hold investors might find this to be a viable vehicle, but those looking to speculate on the short side should look elsewhere.
Trading Slv from the short side involves borrowing shares and paying interest to a brokerage firm to do so. Similarly, traders looking for leveraged holdings in Slv will likely be required to pay interest to their brokerages for the borrowed shares. In addition, Etfs are only tradable about nine hours per day, but asset values are fluctuating for 24!
Determining market direction and timing is difficult enough; adding interest charges makes it worse for traders. The drawbacks of Etfs is in contrast to the advantages of trading silver futures.
Silver in FX: US–based futures and forex firms must register with National Futures Association and due to recent regulation cannot provide clients with access to silver and gold via a forex account. In my opinion, if US regulators have gone as far as to say these products shouldn’t be offered to US clients by US brokerage firms (of course, traders can open overseas accounts), it’s probably best to steer clear. For an entire product to be eliminated, red flags are waving.
Silver bullion: Owning “stuff” has its appeal. However, as a bullion holder you will need space in your home or garage, or deal with storage and insurance fees. Many bullion dealers charge little in commission for brokering the bullion deal, but they aren’t working for free. Bullion dealers charge investors a large bid and ask spread when buying or selling metals; I’ve seen the price vary by $2 or $3 per ounce from the assumed spot price or nearby futures price, which should be figured into transaction costs.
So if an investor has to pay $30 per ounce for silver bullion but could buy it in a nearby expiring futures contract at $27, the dealer will come out ahead. Also, if you want to keep your silver on hand, you will pay a hefty shipping and handling bill along with finding storage space.
Silver futures and options: Comex (Commodity Exchange, a division of the Cme Group) requires a trader to have $10,056 in his or her account to hold one full-sized silver futures contract overnight. If you aren’t familiar with silver futures, one contract represents 5,000 troy ounces of silver and equals a $50 profit or loss per penny of price movement. In some months it isn’t uncommon for silver to move $0.50 in a single trading session, and not many retail traders are willing to stomach swings of $2,500 ($50 x $0.50) per contract per day. As a result, they look to the option market for a venue in which to speculate.
However, they may be better off looking elsewhere. Silver option traders face such wide bid/ask spreads that it seems nearly impossible to profit. In addition to a liquidity problem, the options tend to be overpriced, forcing long option traders to bet the farm, or settle on deep out-of-the-money options.
The solution? I like the idea of mini silver futures; they are one-fifth the size of the original contract and allow the trader to speculate with a lower level of leverage. Each penny of price movement is worth $10 to a mini futures trader, so a 50-cent day would be equal to $500 — more tolerable than $2,500. And unlike Etfs, mini-silver futures traded on the Nyse–Liffe exchange (the Cme Group version of mini silver is illiquid) are available for trading nearly 22 hours per day; there are no interest charges for leverage or selling short, and there are certain tax advantages for those holding positions for less than a year. On the other hand, futures are highly leveraged vehicles and it is human nature for some to overindulge in risk. Futures are not suitable for everyone.