Suppose I'm convinced that silver will reach $100 before Dec 2015 (in 2 years). From this site: http://www.barchart.com/commodityfutures/Silver_Futures/options/SIZ15?mode=i&view= it looks like I can buy a call option on a 5,000 troy ounce silver contract with strike $50 for only $1,345 (at the time of this writing). So if I spend $1,345 to buy this call option today and my prediction occurs, will I really make ($100 - $50) * 5,000 = $250,000 from this trade? (minus the original $1,345) That's a pretty big gain for a pretty low risk. It looks too good to be true, so I must be missing something. What am I missing? Please educate this beginner.
1) Are you on Christmas Break from Rutgers or Syracuse? 2) You're confusing and intermingling the option value with the underlying contract value at the strike price.
You are very correct that a long term option can have a very big gain over the long term. That's the power and danger of options. Here is the practical side of the situation: 1) It is very, very hard for long term fundamental predictions to actually come about. 2) Holding the position, the moment a profit shows, will be extremely difficult. The bigger the profit gets, the more you will watch every tick. You will 2nd guess yourself minute/everyday and it will be like Chinese water torture unless you can get hypnotized to forget it for 2 years. My advice: Find the balance between risk/reward ratio, position sizing, time frame, and brokerage costs. I think that structure will provide you with an "Aha" moment to decide which trades are doable.
Check out this chart to put things into perspective: http://quotes.ino.com/chart/index.html?s=NYMEX_SO.Z15.5000C&t=l&a=&w=&v=dmax Know that the multiplier is $5000 per point for silver. Here's the chart for the silver futures contract over the same time frame: http://quotes.ino.com/charting/index.html?s=NYMEX_SI.Z15.E&t=&a=&w=&v=dmax
But are my calculations correct? I realize that the option won't be worth exactly $250,000 for a $100 silver price. It may a bit different due to the time left to expiry. Other than that, did I get it right?
Also look into the SLV Jan 15, 2016 Call options, which I think might be a better pay out than the future options. The option chain only goes to the $40.00 strike at this time. http://finance.yahoo.com/q/op?s=SLV&m=2016-01 SLV at $18.62 Silver at $19.52 SLV Jan 15, 2016 40.00 calls You could buy 33 contracts SLV Jan 2016 40.00 calls at $0.41 for $1,353. If SLV hits $100.00 before expiry those calls would be worth $198,000.
nice .nice.. http://finviz.com/quote.ashx?t=slv i trust silver to rebound better than gold.. unfortunately I dont like buying calls i will be selling ITM puts.. strike 20 . .jan 2015 for 2.95 so my breakeven is 17.00 if this thing falls.. if it goes over 20. my max gain is 17.5%.. in 1 year.. for cash secured put. but wait. i will be selling naked. just checked in my IB Portfolio acct . it is blocking close to 200 bucks. so my ROI will be 290/ 200.. 150%... hmm.. nice.. nice.. now. the silver lining question is.. ? how many do i sell.. ha ha.
But of course based on Price Action currently that long, medium and short term are pointed south, I think we will see 10.00 before we see 100.00 in next three years.