5 Differences Between Trading the S&P 500 E-Mini & the Micro E-Mini Futures
Trading guides, webinars and stories
Trading guides, webinars and stories
For centuries, our ancestors have recognized the beauty and versatility of Silver and even utilized it as jewelry, construction material, as well as a long term investment option. Through the years, countless civilizations, from the Romans and the Greeks to ancient China and South America, have mined Silver and used it for a wide variety of applications, including using Silver bullion to stabilize their currencies. Today, Mexico, Peru, and China currently top the list of the world’s Silver producing countries. It comes as no surprise that there are various Silver-based instruments available today for trading and investing.
Silver is the most invested in precious metal commodity after gold. Thanks to its versatility and many industrial uses, it is also considered a good investment in the futures market. Silver futures were first traded on July 5, 1933, on the Chicago Mercantile Exchange (CME). A Silver futures contract is a legally binding agreement that covers the delivery of Silver at an agreed-upon price in the future. This contract is standardized by a futures exchange as to the time, quality, quantity, and place of delivery, but the price remains variable.
Below, we’ll discuss topics ranging from how Silver futures trading works to why you might consider investing in a Silver futures contract. Here are the top eight things you should know about Silver futures:
In order to have a clearer understanding of what Silver futures trading is all about, picture yourself as a manufacturer of Silver medals. You just won a lucrative contract to deliver Silver medals for the next Olympics and are currently gearing up to launch production. You need 1,000 ounces of Silver in six months to be able to manufacture all the medals in time, so you check the prices of Silver and see that it is trading at $15 per ounce. For one reason or another (insufficient cash on hand, inadequate storage space, etc), you are unable to purchase all that Silver today. Naturally, you’re worried about how the current Silver price may rise in the next six months.
In order to protect against any future price increase, you decide to lock the purchase price at around $15 per ounce by entering into a six month Silver futures contract. By buying the futures contract, you can then lock in the future price so that by the expiry of the contract you are guaranteed to buy your 1000 ounces of Silver at only $15 per ounce. Problem solved.
Now consider the other side of the trade. Picture yourself as the owner of a Silver mine and a manufacturer approaches you, intending to purchase 1,000 ounces of Silver in six months’ time. You’re concerned about the price of Silver declining to below its current price of $15 per ounce. You can benefit by selling the above-mentioned Silver futures contract available today at $15. This guarantees that you will have the ability to sell your Silver at the set price. At the time of expiry of the contract, six months from now and regardless of how the prices have changed, both the manufacturer and the Silver mine owner walk away satisfied with the business that was concluded.
You’re probably wondering why a buyer and a seller cannot simply meet, discuss terms, and agree on a future price of Silver with the promise of settling the trade on a set expiry date. This method is actually called forward trading and has been in existence for a pretty long time. The problem with forward trading is that it is not standard and therefore presents counterparty default risk. This simply means that there is always the likelihood or probability that one party might default on its contractual obligation, especially since there is no governing body regulating the transaction. Hence the need to deal in Silver futures through an exchange. This provides the following benefits:
When trading Silver futures on COMEX, each contract would specify the price for the delivery of 5,000 or 1,000 troy ounces of 999 fineness Silver during an agreed-upon delivery period at a licensed depository. Some CME approved depositories for the storage of Silver deliverables when a futures contract settles include Brinks Inc., CNT Depository Inc., JP Morgan Chase Bank NA, International Depository Services of Delaware, HSBC Bank USA, and Malca-Amit USA, LLC. These contracts are marked to market daily, such that the profit or loss for the day is added to or subtracted from the cash balance in your brokerage account.
|Venue||CME Globex, CME ClearPort, Open Outcry (New York)|
|Contract Size||5,000 troy ounces|
|Price Quotation||U.S. dollars and cents per troy ounce|
|Trading Hours||Sunday – Friday 5:00 PM – 4:00 PM Chicago Time with a 60-minute break each day beginning at 4:00 PM Chicago Time|
|Minimum Price Fluctuation||Outrights: 0.005 per troy ounce = $25.00
Spreads: 0.001 per troy ounce = $5.00
|Trading Termination||Trading terminates at 12:25 PM Chicago Time on the third last business day of the delivery month.|
|Delivery Period||Actual delivery can be done on any business day beginning on the first business day of the delivery month or any subsequent business day within that delivery month. However, it must not be later than the last business day of the designated delivery month.|
|Grade And Quality||All Silver delivered under this contract shall be appraised at a minimum of 999 fineness.|
When trading, you’ll want to start by identifying a contract expiration month. To enter a long position, place a bid on the CME Globex system to purchase one or more contracts of the specific expiration month. For instance, let’s say your accepted bid for a six-month contract is $25.50 per ounce, the value of your contract will be $127,500 for 5,000 ounces. Alternatively, you can go take a short position by placing an offer to sell contracts on Globex. Keep in mind, however, that your futures brokerage account must have sufficient cash to meet the CME’s initial margin deposit requirement per contract.
The good thing about futures contracts is that you don’t need to have the entire amount of the contract value in order to trade. Instead, you only need to put up the margin deposit, a good-faith deposit to make good on the contract. This potentially allows investors to make significant returns on their investment due to leverage, but may also result in large losses. That’s why leveraged instruments are not suitable for all investors.
Investors purchase Silver for a variety of reasons, but the following are some of the most common ones:
In order to understand the global pricing trends for Silver, the first thing you need to consider is demand and supply. Unlike gold where the demand predominantly comes from the need for jewelry, investment and store of value, the demand and supply for Silver are somewhat different. Nearly 85% of Silver is supplied from Silver mines around the world while the remainder comes from recycled scrap. This means:
Here are some helpful rules that you should follow when trading Silver futures so you can limit risk and maximize return:
If you are trading Silver futures, especially as a short-term trader, you’re probably not concerned about the delivery mechanism. You can simply close your long or short Silver futures position in time before the contract expires and rake in the benefits or losses through a cash settlement. However, if you are planning to hold your position until the expiry of the futures contract, then you’re looking at either receiving or delivering (depending on if you’re the buyer or seller) a 5,000-oz COMEX Silver warrant for a full size silver futures contract. This warrant entitles you or the counterparty of the transaction to the ownership of equivalent Silver bars in your designated depository. In the case of the micro (1,000 ounce) contracts, you will either receive or deposit an Accumulated Certificate of Exchange (ACE), which represents 20% ownership of a standard full-size Silver warrant. You may then accumulate five ACE’s to get a 5,000-ounce COMEX Silver warrant.
Silver futures investing can be a solid addition to any portfolio but only if done in carefully measured quantities. As a hedging asset, Silver can deliver a steady, diversified return compared to traditional stocks, especially in times of economic downturns and rising inflation. Amid increasing speculation of a bullish market looming on the horizon for Silver futures, this might be the ideal time to give it a second look. Nevertheless, you should be careful about taking large speculative options on Silver or other precious metals. Silver is highly volatile and if it makes up the bulk of your portfolio, your entire investment may be rocked by its turbulent price swings. As with every other investment, a proper understanding of the market and its core drivers is key to a successful venture. Once you are ready, take the next step and start The Gauntlet Mini™ here to prove your trading skills and become a professional trader.