How to Calculate a Silver Futures Contract

Daily silver futures trading volume on the CME exceeds 57,000 contracts.

Daily silver futures trading volume on the CME exceeds 57,000 contracts.

Silver futures are used by hedgers to lock in the price of the lustrous metal and by speculators to bet on future silver prices. Each futures contract specifies the price for the delivery of 5,000 troy ounces of 999 fineness silver during a designated delivery period at a licensed depository approved by the Chicago Mercantile Exchange – the CME. The contracts are marked to market daily – the day’s profit or loss is added to or subtracted from the cash balance in the trader’s brokerage account.

Calculating Silver Futures

Identify a contract expiration month. To create a long position, you purchase one or more contracts of specific expiration month by placing a bid on the CME Globex System. For example, if your accepted bid for a six-month contract is $32.25 per ounce, your contract value will be $161,250 for 5,000 ounces. You can instead create a short position by placing an offer to sell contracts on Globex. Your futures brokerage account will need sufficient cash to meet the CME’s initial margin deposit requirement of $12,100 per contract.

Monitor the contract. As prices rise and fall throughout the day, the minimum price change, or tick, is $0.005 per ounce, or $25 per contract. If a contract price rises ten cents to $32.35 per ounce during the day, the contract value at that point will have jumped by 20 ticks, or $500.

Calculate the daily settlement. The day’s final price is used to mark contracts to market. If the final price per ounce is $31.95, the contract will have sustained a loss of 60 ticks, which is 30 cents per ounce, or $1,500. This is the amount that will be transferred out of your brokerage account for the day. If you had originally sold the silver contract, your account would be credited with a $1,500 profit.

Add cash to your margin account, if necessary. To avoid a margin call, you will want to immediately replenish your margin account to meet the maintenance margin requirements for your contract. Margin calls are demands for additional cash deposits – if not immediately satisfied, your broker can liquidate your contract. In this example, if you had funded your account with the minimum initial margin of $12,100, you balance after the day’s mark to market loss of $1,500 would be $10,600. Since the maintenance margin requirement is $11,000 per contract, you would need to immediately add $400 to your account to avoid a margin call.

Items you will need

  • Access to current silver contract prices on the futures exchange.

Tip

  • You can partially or fully hedge contract losses on your long contract position by buying a put option on your silver contract. Each put gives you the right to sell one silver futures contract for a specified price, the strike price. You are therefore insured against prices moving below the strike. The cost of this insurance is the option’s premium, or purchase price. Short futures positions are hedged by buying call options. Silver options-on-futures are traded on the CME alongside the silver futures.

Warning

  • In volatile markets, a futures contract’s price can change rapidly. To prevent losing more than your budgeted amount, you can set a stop loss order when you open your futures position. If market prices cross your stop loss price, your contract will be closed out at the then-current market price. Many traders always include stop-loss orders on each contract position. Others dismiss them, saying that they lock in losses. You must decide whether your intolerance of risk requires you to use stop loss orders.

Resources

  • Silver - The Investment Of The Decade 2010-2020; Mike Alan
  • Rich Dad's Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future; Michael Maloney
  • Precious Metals Investing For Dummies; Paul J. Mladjenovic

Photo Credits

  • Comstock/Comstock/Getty Images