The next part of Blog Silver’s “silver futures” stories involves getting you to understand how a silver future’s contract works. For those of you who have been wondering exactly how silver future’s contracts work, then this should help you tremendously.
The best way to explain a silvers future’s contract and how it works is to layout an example of one. This is a great example of how one would work.
You agree to buy 1,000 ounces of silver, in three months to the day from right now. You agree that in three months to the day you will purchase those 1,000 ounces of silver at $6 per ounce on that day. That future date is called the delivery date or final settlement date.
The pre-set price you agree to with the second party is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
Once that contract is agreed upon, then it is a waiting game until the agreed upon day arrives.
If an ounce of silver on that day is worth $10, then you win, as you are only paying $6 for an ounce of silver that is considered to be worth $10. You would have made a $4 an ounce profit. If you do the quick math on that, then you see that you have just purchased $10,000 worth of silver for only $6,000.
The seller loses of the future’s contract loses in this case, as you are only paying $6 an ounce for something that is worth $10 an ounce.
Conversely, if the price of silver goes down within the agreed upon 3-month time frame to say $3 per ounce, then you will find yourself paying $6 per ounce for something worth only $3 per ounce. If you do the quick math on that, then you can see you (buyer) lost $3,000.
The worst part about this situation is that you (buyer) do not get any of the silver. This is an all cash transaction, so if you lose, you come out with nothing. You don’t lose $3,000 and hold on to any leftover silver. The one saving grace – should you have the stomach for it, is that you can indeed rollover into another futures contract.
Here is what it boils down to. Silver future’s contracts are basically a huge gamble. While there are a few who come out on top, you may have a better chance of winning money at a casino then you do of banking huge off a silver future’s contract. There are also much better options available when it comes to investing in silver.
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