The buyer of a silver option contract is conferred the right (but not the obligation) to buy or sell a specific amount of silver at a fixed price (strike price) to be delivered on a designated date. This right can be exercised anytime before the option expires but the option buyer can opt not to exercise the option should the price of silver move against him.
The advantage of buying silver options is similar to that of silver futures in that they both provide significant financial leverage. However, unlike a silver futures contract, the silver options contract holder do not have the obligation to buy or sell the underlying silver. Hence, the silver option buyer's downside risk is strictly limited to the cost of the option - i.e. the premium plus any transaction costs.
The disadvantage of silver options is that they can expire worthless if price of silver does not appreciate beyond the strike price within the lifetime of the option.
Another useful aspect of investing in silver options is that, unlike more traditional silver investments such as silver coins or silver stocks which only gain in value when the price of silver goes up, it is possible to profit from a drop in silver price when trading silver options. One can purchase silver put options, which gain in value as silver price falls. Buying silver put options allow the astute silver investor to bet against silver price. An investor with a sizable stash of silver bars or silver coins can also protect the value of his holdings against falling silver price by purchasing some silver put options.
For the novice investor, options trading can be a rather complicated subject. You can learn more about trading silver option contracts at The Options Guide.
How to Start Trading Silver Options
To buy or sell silver options, you need to open a trading account with a broker that handles silver futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.