Basic question for experienced options traders

P

pgo1970

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.
 
Quote from pgo1970:
----silver will reach $100 before Dec 2015 (in 2 years).
----call option....
----strike $50....
----$1,345....
----my prediction occurs....
----looks too good to be true....
----I must be missing something.
----What am I missing?
More...
1) Are you on Christmas Break from Rutgers or Syracuse? :confused:
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.
 
Quote from xandman:
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.
More...
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
Screenshot-1.png

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.
 
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