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What are Silver Options?

Article Details
  • Written By: Éibhir Mulqueen
  • Edited By: A. Joseph
  • Last Modified Date: 02 July 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Silver options are financial products that are backed by silver and can be invested in or traded like other options. Like futures, silver options are a type of financial derivative because they are derived from the commodity underpinning their value. Silver options offer a way of indirectly investing in silver.

In a sense, silver options are best regarded as a kind of bet. If, for example, silver is priced at $100 US Dollars (USD), an investor might bet somebody $0.10 USD that silver will rise above $104 USD within three months. As part of the bet, for every $1 USD that silver rises above $104 USD, the investor will receive $0.05 USD. So if it rises to $110 USD, the investor will collect $0.30 USD in return for his or her $0.10 USD stake.

If the investor is wrong and the index does not rise above $104 USD, the investor will have lost his or her $0.10 USD stake money but nothing more. This would be a silver option that the investor has created. The advantage of this over buying shares is that the investor does not have to put up large amounts of money to get a return.

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Options trading is less risky than futures trading, but the potential returns are much less. In the above example, a futures silver trade would be where the investor makes an agreement that somebody will pay $0.10 USD for every $1 USD rise in silver above $100 USD within three months, for example. The investor also agrees to pay the other party the same amount for every $1 USD fall in the price of silver. Such options and futures contracts are in themselves able to be traded on the stock market.

Silver, like gold and other precious metals, has remained popular because it is not just bought and sold as a practical industrial metal but is traded for the relatively stable value it retains as a rare metal. There are a variety of other ways of investing in silver. The most basic way is for one to purchase silver bars through a bullion trading company. Investors usually will not take actual delivery of them for security reasons but will opt for the selling company to hold their investment in trust and pay a storage fee.

Investors also can buy shares in silver by investing in silver trust funds. Such funds are not the exact equivalent of an investment in silver, but they give investors a cost-effective option of participating in the silver market through the stock exchange. A riskier investment might be to buy shares in a silver mining company.

The popularity of silver and its financial derivatives is that it has practical use in industry, such as the electronics one, and, of course, it has lasting appeal as jewelery. Like gold, silver is a popular investment vehicle when stock markets are going through volatile periods or economies are experiencing high inflation. Precious metals generally offer safe havens for savings, and although the gains might not be spectacular, the losses shouldn't be, either.

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