Silver Futures Contract Specifications
Symbol
SI
Exchange
CME
Tick Size
$5
Contract Size
5,000 troy ounces
Contract Months
January, March, May, and September
Trading Hours
Sunday - Friday 5:00 p.m. - 4:00 p.m. CT
Settlement
Deliverable
Last Trading Day
The third last business day of the contract month.

What to know about silver

Silver is a soft, ductile, and malleable metal, with a very high electrical and thermal conductivity. It is one of the most useful and popular metals in the world. Here are the things you should know about silver:

History

First used in Asia Minor, silver has been mined for thousands of years, as ancient civilizations recognized the beauty and versatility of the metal. The first evidence of its use as currency dates back to about 700 B.C., in the Ancient Greek Empire, and since then, silver coins and bullion have played a major role in the history of global currency.

In fact, the sterling (Great British pounds) got its name from the fact that the currency was once considered to be worth one pound of sterling silver. Even the U.S. dollar prior to the Civil War was also made from silver coins. Presently, Mexico is the only country that uses silver in her coins.

Production

The world’s silver supply comes from both mining and recycled products. Mined silver is typically extracted from ores of copper, gold, and zinc. While consumption is spread all over the world, most of the metal is mined from Mexico, Peru, and China. Silver is also produced in some U.S. states such as Nevada, Alaska, Arizona, and Idaho.

Uses

Silver is used for making a variety of products, including jewelry, glass, and common household appliances. Owing to its high thermal and electrical conductivity, silver is also used in electrical and electronic appliances, as well as in the automobile industry. It is a prominent component of solar cells, which provide an alternative source of energy.

What are silver futures?

Futures are derivative financial products whose value depends on the underlying asset. A futures contract is an agreement to make or take delivery of a specified quantity of the underlying commodity on a specified future date, at a presently agreed price.

In the case of silver futures, the underlying asset, which is delivered on the final settlement day, is physical silver metal. Silver futures started trading on the commodity exchanges as early as 1933.

The contract trades on commodity futures exchanges and is standardized, with the quantity, grade and quality, dates of delivery, and the value of the contract clearly stated on the contract specifications. To make sure that none of the buying or selling parties defaults, the clearinghouse of the exchange acts as the middleman between parties.

Thus, the seller is in a contract with the exchange to supply the silver on the delivery date in accordance with the contract terms, while the buyer is in a contract with the exchange to take the delivery of the silver after completing the payment for the contract — the contract often trades on margin. What this means is that with a small percentage of the total worth of the contract, one can trade the contract.

To make the final settlement easier, the contract is marked to market, so the daily differences in price are settled at the end of each trading day. A trader in a losing position is asked to deposit additional funds to maintain the margin level, while the profit accrued to the person in the opposite trade is added to his equity.

Does buying silver futures contracts mean owning the physical metal?

Buying a silver futures contract doesn’t necessarily mean that the buyer will own the physical metal. The commodity is delivered at the expiration of the contract only if the buyer holds the contract until expiration date and intends to take delivery of the metal — but the settlement and delivery process can be quite complicated.

However, most people who trade the contract don’t intend to get involved in making or taking delivery of the commodity, so they find a way around it. There are two ways to avoid the delivery process before the contract expires:

Closing the position before expiration: Most speculative traders, especially short-term traders, close their positions before the contract expires in order to avoid the settlement and delivery process.

Rolling over to the next contract period: Traders and hedgers with a longer-term interest tend to rollover their expiring contracts to another contract with a further expiration date by simultaneously closing the current position and opening a new one with a further expiration date.

For a trader who unknowingly allows his position to expire but still wants to avoid the delivery, he can retender the commodity after paying a retendering fee.

How do silver futures contracts trade?

How do silver futures trade?

How do silver futures trade?

Just like most popular commodities, big corporations can trade silver over the counter, where they can customize their agreement as they find suitable. This type of contract is called a forward contract. Silver futures contracts, on the other hand, are standardized, and they trade on commodity exchanges. These are important features of how silver futures trade:

Exchanges where silver futures contracts trade

Silver futures trade on several popular exchanges around the world, such as the London Metal Exchange (LME), Tokyo Commodity Exchange (TOCOM), Multi Commodity Exchange (MCX), Chicago Board of Trade (CBOT), and the Commodity Exchange Inc. (COMEX). Both the CBOT and the COMEX are now subsidiaries of the Chicago Mercantile Exchange (CME) Group.

But the most recognized exchange when it comes to trading precious metal is the COMEX exchange. So, we will focus on the exchange in discussing the features of silver futures contracts.

Margins and leverage

Margin is the minimum deposit required to carry a contract. At the time a contract is initiated, there’s a minimum amount a trader must have with the exchange to be able to open the contract — this is referred to as the initial margin. Depending on the market condition, the initial margin can range from 5% to 20 % of the total worth of the contract.

As the trade is making profits or losses each day, there’s a minimum amount the trader’s equity should not go below, which is referred to as the maintenance margin. On the CME, the maintenance margin for a full silver futures contract is $5,200. When the equity is falling below this value, the trader will be required to make additional deposits (margin top-up or variation margin) to keep his equity above $5,200.

Since only a small percentage of the contract value is required to trade futures contracts, they are considered a leveraged instrument. Leverage is the factor by which a trader’s capital can be multiplied to get the total value of the contract (Leverage = total worth of contract / trader’s capital).

For example, a contract of silver on the CME is equivalent to 5,000 troy ounces of silver, and the price quote for May 2020 contract is $17.125. So, the total contract value is $17.125 x 5,000 = $85,625. For a trader who’s using $6,000 to carry a full contract, the leverage will be $85,625/$6,000 = 14.27. That is, the trader can potentially make over 14 times more profit or loss than he would make when trading without the leverage.

Contract specifications

One full contract of silver (Si) settles for 5,000 troy ounces of the metal, and the price quotation is in the U.S. dollar and cents per troy ounce. The minimum price fluctuation is as follows:

  • For outright transactions including EFP, it is $0.005 per troy ounce or $25.00 per contract
  • For straddle or spread transactions and settlement prices, it is $0.001 per troy ounce or $5.00 per contract

Apart from the standard full contract, the COMEX also offers other variants of silver contracts with a fewer number of troy ounces of silver. The mini contract is equivalent to 2,500 troy ounces of silver, while the micro contract is equivalent to 1,000 troy ounces of silver.

There are monthly contracts listed for three consecutive months and any January, March, May, and September in the nearest 23 months and any July and December in the nearest 60 months. Trading terminates at 12.25 p.m. CT on the third last business day of the delivery month.

The contracts are settled by physical delivery at expiration, and delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month. The silver delivered under this contract shall assay to a minimum of 0.999 fineness and must be stamped and serialized by an exchange-approved refiner.

Trading at Settlement (TAS) is subject to the requirements of Rule 524.A and may be allowed in the active contract month. The active contract months will be March, May, July, September, and December, and for any stated date, TAS transactions will only be allowed in a single contract month. TAS uses the exchange-determined day’s settlement price or any valid price increment ten ticks higher or lower than the settlement price.

Roll over and roll-over cost

For investors who keep their positions for a long time, there will be a need to roll over their positions to a new contract with further expiration dates. But the decision to roll over positions can be a very difficult one, especially for those who are in losing positions, because of the cost involved in simultaneously closing positions the expiring contract and opening new positions in the new contract.

Unfortunately, there is no option of doing nothing — whoever doesn’t want to get involved in physical delivery of the commodity must either close his position or roll it over to the next contract month, which may be more expensive. Some brokers do offer to roll their customers into the new period at a reduced rate.

Daily settlements

Silver futures contracts are marked to market, so at the end of every trading day, each trader’s profits or loss is credited or debited from his account. Any trader whose equity is falling below the maintenance margin is required to top up his account to be able to continue carrying the trade.

The settlement is done each day until the contract expires, and at expiration, the buyer pays up the balance, while the seller delivers the commodity. The clearinghouse of the exchange oversees both the daily settlement and the delivery process at expiration.

Silver Futures Trading Strategies

Silver Trading Strategy

Silver Trading Strategy

The silver futures market is a great market to trade, and trading strategies on this market tend to be quite uncorrelated to other markets, like the SP500, just to name one example. Thus, silver futures trading strategies are definitely worth looking for, and while the market isn’t as easy as the S&P500, just to name one example, you should be able to find some great trading strategies if you just put in enough effort!

The image above is from one of our silver trading strategies that we trade at the moment!

If you’re interested in getting trading strategies for a variety of futures markets and ETFs, we recommend that you have a closer look at our edge membership

Factors affecting silver futures prices

In recent times, there have been high levels of volatility in silver prices. Although there are so many factors that can influence the price of silver futures, we will discuss a few of them here.

Industrial demand: Before the boom in the technology industry in the 1990s, industrial demand for silver was less than 39 percent of the total silver demand. Investment demand accounted for more than 60 percent. But now, the use of silver in various industries account for more than 50 percent of the total demand, and this could account for the increased volatility in silver prices. With an increase in demand for electronics and automobiles, silver prices may go higher, but if there is a slowdown in industrial demand, the prices may fall.

Investment demand: While the demand for silver bullion for investment purposes is declining relative to the industrial demand, it still very significant. If more people get interested in stockpiling silver bullion, the futures prices may rise.

Oil prices: Owing to its high conductivity, silver is used in making alternative energy sources, such as solar energy cells. Thus, if oil prices are rising, the demand for alternative energy sources will be on the rise, which can push up silver prices.

Supply imbalances: When there is an excessive supply of the commodity, the prices will decline, and when there are supply shortages, prices will go up.

Alternative investment: The performance of alternative investment options can affect silver prices. For example, if gold prices are too high for investors, they may decide to buy more silver instead, thereby pushing silver prices up too. Another example is when there is a selloff in the stock market — investors tend to move their funds to the commodity market.

Seasonality

Here is a seasonal chart of the silver futures market.

Silver Futures Seasonality

Silver Futures Seasonality

Source

Why do people trade silver futures?

There are different reasons people trade silver futures, but those reasons generally fall under hedging, portfolio diversification, and speculation.

Hedging

Using silver futures for hedging purposes falls under two categories: hedging against silver price fluctuations in the future and hedging against inflation.

Hedging against silver price fluctuations in the future

For silver producers and those who use silver in their manufacturing processes, the silver futures market is where they come to hedge against future price fluctuations.

Let’s say silver is trading at $17.00 per ounce, and a silver mining company is concerned that the price of silver may decline in the future and cut down its profitability. The company may approach the futures market now and sell a number of silver contracts that can cover its anticipated production level. If, by the time it produces the silver, the price has declined to $14.00 per ounce, it must have secured $3.00 per ounce.

Similarly, a manufacturer of solar cells who needs silver for his products can use silver futures to secure a stable supply of the commodity in the future at the present price. If there is a shortage of supply in the future and the price rises, he won’t have to worry because he had secured a contract at the previous price.

Hedging against inflation

Over the long term, commodities like silver appreciate in value, unlike paper currencies that lose their purchasing power as governments print more money. Some investors continue to acquire precious metals as a way to store their wealth and protect it against inflation.

Portfolio diversification

Many investors and fund managers understand the need to diversify their portfolio across several asset classes, and they see silver futures as one of the ways to do that. By spreading their investments across many asset classes, they’re reducing their exposure to market risks.

Speculation

The great majority of traders in the silver futures market trade for speculative purposes. These traders are not interested in the physical silver; their only interest is to benefit from the daily changes in silver prices.

Gold/Silver Ratio

One common indicator silver futures traders monitor is the gold/silver ratio, which is the number of ounces of silver that worth the value of one ounce of gold. With gold trading at $1,480.00 and silver at $17.00, the gold/silver ratio is 87.06. When the ratio is high, investors look to accumulate more silver, and when it is low, they tend to sell off their silver.

Conclusion

Silver is the second-most-popular metal in the futures market. It has a wide variety of uses — currency, jewelry, and industrial applications. Silver futures contracts are offered on several commodity exchanges, including the CME Group, LME, MCX, and TOCOM.

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