29 Questions for a Futures Broker - Answers
(Answers 1)
Silver Stock Report
by Jason Hommel, March 15th, 2009
These are my interview questions for any Futures Broker that I would
like to publish in this Silver Stock Report which goes out to 80,000
emails. If any Futures Broker responds to my questions below, I
would like to share them with my readers, and direct some business their
way. If more than one Futures Broker will respond, I will publish
the best answers, and perhaps list several Brokers as a reference.
I
don't trade futures contracts or options, and I never have, and I don't
recommend them for anyone.
http://www.silverstockreport.com/2008/futures.html
So,
clearly, I have a certain ignorance of the subject, based on a lack of
direct personal experience, and that will, of course, be reflected in my
questions. On the other hand, I do have my opinions about the nature
of futures, what they do, and how likely they are to default, based on
other research and statistics that I'd like to share with you, and ask
about. I will start with some basic questions about how futures and
options work.
I know one silver futures contract is for 5000 ounces of
silver, which is for five 1000 ounce bars, and each bar may vary by weight
up to 10%, and that the difference is settled upon delivery.
1. When one buys a silver futures contract
at the NYMEX, how far out are the contracts traded, meaning, what is the
maximum length of time from now that delivery can be contracted
for?
Futures Broker:
Contracts trade out for a few years but there is not enough liquidity
in the contracts that are out more then 6 months. Most traders buy the
closest month contract & then at or before expiration they will roll
the contract this means that they sell the one that they have & buy
the next one.
2. And what is the typical length of time
for most contracts? How far out is the largest and most
heavily traded contract month?
Futures Broker:
3 months. The
most traded is the next expiring month so as of today the most traded
month is the March contract which you would need to be out of during the
last week of February
3. Can you explain why the time
limit on contracts exists, for example, why don't they trade twice as far
into the future? Is it lack of liquidity, lack of desire of traders,
or does the "time" become too expensive, or what?
Futures
Broker:
My understanding of this is that the time gives the clearing
house a chance to clean up positions & put the money in the correct
accounts. Let’s say that I bought silver @10.00 & now it’s @ $11.00 so
I have an unrealized gain of a dollar & someone else has an unrealized
loss of a dollar. Since both these positions are open money can not be
correctly moved from one account to another until the trade is closed.
4. If one buys a futures contract in silver, about 1
year out at about current prices, what kind of leverage can be
purchased? What's the percentage of the value of the silver that you
have to put as a down payment to buy 1 contract? In other words,
what's the cost of 1 contract about 1 year out at about current prices
right now?
Futures Broker:
Margin requirements sometimes
change based on how volatile the market is. The safest way to buy is to
only buy the amount of money that you have so let’s say someone has $100,
0000.00 to invest & margin is $5,000.00 per contract then he can buy
20 contracts which is 100,000 oz of silver. Now if he buys this amount
& he is right then he will make a lot of money. If he is wrong &
silver goes down $1.00 then he losses all the money. The best thing for
someone to do is buy silver for $100,000.00 which is 10,000 oz & then
the rest of the money should be used for another investment. This I think
is the smarter way to invest because now the same $100,000.00 is being
used in 2 investments. Hopefully you won’t be wrong on
both.
5. I know options give one the right, but not the
obligation to buy a futures contract. And thus, you can't get a
margin call with options, and you can't lose more than what you pay, in
case the price moves against you temporarily. What is the cost of an
option on that same futures contract, about 1 year out, at current
prices?
Futures Broker:
I personally do not trade options
though I know all about them. I think that options are like lottery
tickets, Once in a blue moon someone wins & the rest just lose the
money. The only strategy that I’ve ever used with options is to sell them.
This way you collect the premiums paid. Options are really complicated
& are not for most people.
6. Do you prefer to trade
options, or futures, or do you have no preference, or do you simply buy
what is cheap depending on market conditions?
Futures
Broker:
As said futures only.
7. What is the typical
liquidity of the silver options market? Specifically, how much money
can one spend to move the silver options market more than 5-10%?
What's a typical spread in case one was to buy and sell a silver options
contract immediately, say, 1 month away, or 1 year out?
Futures
Broker:
It is very expensive to trade this way & unless you are
paying a very small commission it doesn’t pay. It also doesn’t pay because
most people end up taking a profit on the portion that is making money
& then get hit with a big loss on the other half.
8.
I understand there are position limits of 1500 contracts in a given
month. How much money would it take, at a minimum, to buy 1500
silver options contracts, a year out, at the best prices, in your
opinion?
Futures Broker:
It would take more money then most
of us have because part of option pricing is based on demand so the
premium that you would have to pay would be too much & it for sure
won’t pay at that point to buy the option & it would pay to buy the
future.
I had a customer that 2 years ago bought 1000 oz calls on gold.
The next day there was an article in the paper that some smart money was
betting that gold was going to $1000.00 in reality he was buying the calls
because he was short gold & was using them as a hedge against the
short position.
9. What is the open interest in silver
options contracts, a year out, in the most liquid
contracts?
Futures Broker:
Again options are not something
that I trade but you can see these in your local paper or as part of any
quote system that you use.
10. What is the silver
options market saying about future silver prices a year from now, right
now? Does the options market give any sort of prediction on price,
based on how the options are priced? For example, what does the
silver price need to be a year from now, in order to put a silver futures
option one year out, "in the money"?
Futures Broker:
Again I
do not trade the options but can say this. There are traders that are
watching the options market & will buy or sell options if the prices
of the options are out of sync with the silver market.
11. How are most futures contracts priced, who prices
them, and by what method? Do most traders use computers and a
black-scholes model, or do they look at charts, or is it just "the
market"?
http://en.wikipedia.org/wiki/Black-Scholes
Futures
Broker:
In simple terms the futures are the spot price plus the current
interest rate up to the time that the contract expires. So if the spot
price is $12.00 then the futures price will be a few cents higher for the
interest. In reality since the futures market is so big when I buy spot
silver the traders quote me the futures with a discount for the
interest.
12. What gives you confidence that
there won't be a default in silver futures contracts at the
NYMEX?
Futures Broker:
If any contract would default then
this would be a problem for the entire system not just the silver market.
When I buy a contract the brokerage firm is GUARANTEEING that I will make
good on this commitment. In addition the brokerage firm has its own
insurance for this. This is also on top on the margin that I need to hold.
In the event that the silver market goes straight up first I would get
stopped out because I would not have enough money in my account the
difference would then be charged to the brokerage & then the insurance
would have to pay the balance. Also the way things are right now the
government would then be making some sort of a bailout. If you really
think about it & you really believe that there is a short manipulation
going on by some of the big firms then you also need to believe that the
government would be bailing them out so they really do not need to worry
about this short position because the government would need to continue to
carry this short position while they bail them out. The government would
not close out this short as this would hurt them in a big way sooo I now
really do not think that buying silver because of a supposed short
position would be worthwhile. -
13. it’s my
understanding that the NYMEX went public a few years ago, and was recently
sold to the CME. With public ownership via stock, there comes the
benefit of limited liability. Thus, it seems to me that the exchange
owners have now a somewhat reduced liability in the event of a default in
the silver futures, thus, it seems to me that one of the protections
against default has been removed. Is my reasoning off base
here?
Futures Broker:
Yes as I explained with answer
#12.
14. I'm concerned about default because the open
interest is always so much higher than the silver that is in the
warehouses, both registered and eligible for delivery.
As of 2-10, the
open interest is 130,692 contracts for 5000 oz. each.
http://www.cftc.gov/dea/options/deacmxsof.htm
That's
a total of 653,460,000 ounces, is that correct?
Right now, the silver
warehouse stocks, total, registered and eligible, for all 4 warehouses, is
124.7 million ounces.
http://cmegroup.com/trading/energy-metals/nymex-daily-reports.html
See
"Warehouse Stocks" and then "Silver Stocks" at the bottom of the
page.
That seems to be quite an imbalance, so what is the guarantee
that the shorts can deliver silver to the longs?
Futures
Broker:
In the real world most traders are not using the comex to
deliver the shorts. Remember these are contracts. This means a piece of
paper that you have to make good on. In other words if I’m short then I
would buy the metal to cover the short I would not be delivering it to the
Comex to repay but would be buying back the contract. A few years ago
wheat or sugar went up 100% as the contract expired this was because there
was a big short position on. The contract that went up the 100% was only
the expiring contract & the next contract went up but only a few &
because there was no real shortage just that there was a short position on
at the close of the contract.
15. The CPM Group produces
an annual yearbook of statistics on silver. Are you familiar with
this group, and if so, what do you think of the quality of their
research?
http://cpmgroup.com/
Futures
Broker:]
I think that they are very good. They have in the past come up
to my office to ask me questions as they compile the research. I
personally do not use it.
16. There is another major
market in silver, besides the NYMEX, and I'm speaking of the LBMA, the
London Bullion Market Association, which is a group of very large bullion
banks that all act as market makers for bullion orders for their own
clients. http://www.lbma.org.uk/members_list.html
In
the 2008 CPM Group yearbook, on page 16, they list the Estimated Silver
Inventories in London and Zurich at about 75 million ounces for
2006. That seems a rather small amount, what do you
think?
Futures Broker:
Again most silver do not end up at
WAREHOUSES for delivery
17. The CPM group also lists
that the LBMA annual trading volumes in silver are 30 billion
ounces. That seems excessive in light of how little silver the CPM
Group lists in the estimated silver inventories. Do you think such
trading volumes are excessive, if they are based on so little silver, as
it seems that the entire stock of silver is traded more than that
daily! 30,000 million ounces, divided by 250 trading days, would
require an average of 120 million ounces of silver traded daily, on
average, which is far more than the 75 million ounces estimated that they
have. Do you find that much trading to be excessive, or do you think
its evidence that they are trading silver that they do not
have?
Futures Broker:
They are trading silver that just is
not in the inventories this doesn’t mean that this silver doesn’t
exist.
18. Morgan Stanley, who is not a LBMA
market making member, but who also trades silver for clients and offers
unallocated silver accounts, recently admitted that they practice
fractional reserve silver banking, as follows:
Ted Butler writes:
"I
found it appalling that Morgan Stanley would claim to store silver that
didn't exist and even have the chutzpah to charge for the storage."
"In
fact, in the court documents summarizing the proposed settlement, one of
Morgan Stanley's defenses was that they were not doing anything unusual by
charging storage on metal that didn't exist, as this is a widespread
industry practice."
http://www.investmentrarities.com/10-23-07.html
Does
that concern you, and do you have an opinion or comment on
that?
Futures Broker:
I am not familiar with this case but
would like to say this. Many customers have silver that they keep with me.
I do not always keep this silver at my location as I try to maximize
profit. So what could be that is happening is that for example if someone
left me with 100 oz silver & then a customer comes in and buys it I
would sell it to this customer & buy it somewhere else I then might
keep the silver there until I need it. If I was charging the depositor of
the silver storage I would still charge it because I am still storing the
silver it just isn’t in the same location any more.
19. I would like to discuss some of the overall market silver
statistics. The CPM Group and Silver Institute have somewhat similar
numbers, but they both say that about 600 million ounces of silver is
mined each year, and about 900 million ounces total supply, with the
difference being recycling, government selling, and/or investor
selling. They both say that investor buying is very small, about
40-60 million ounces per year, and this is actually a new trend, ending
investor selling. This means that about 5-10% of the silver market
is investor buying. At $15/oz., that's just under $1 billion worth
of investor demand, annually.
Do you see these supply and demand
factors as more bullish than for gold, since there is less room for new
investor demand?
Futures Broker:
I do not follow this as
there are just way too many other considerations then these when thinking
about buying or selling the metals.
20. Are you aware of
the reports of silver shortages for all retail forms of silver, from 1
ounce rounds, to 100 ounce bars, to Silver Eagles and Maples? For
example, the U.S. Mint, although producing nearly twice as many Silver
Eagles this year than last year, is trying to illegally ration them?
http://www.silverstockreport.com/2008/eagles.html
Futures
Broker:
I am aware of these reports. As I have written in the past I do
not think that there is a shortage I just believe that the demand for
items not make anymore is large thus creating a perceived shortage. This
is like asking your grocer for 10 eggs when they come in boxes of a dozen.
Before 2008 if anyone sold me 100 oz bars of silver I would melt them as
there were no customers for them. My dealer Johnson & Matthey in
Toronto stopped producing anything other then 1000 oz silver bars. In gold
they now only make kilo bars & 400 oz bars. The 100 silver bars now
come from the Salt Lake City branch which doesn’t have the capacity to
make as many as the demand calls for. Nevertheless silver in grain form
which J.M. still makes I can get as much as I need.
21. Is there any indication that 1000 ounce COMEX bars
are in short supply, and if that were to happen, how would we
know?
Futures Broker:
I don not have such an indication. As
a matter of fact J.M. tells me that they have more then enough. When they
would start to tell me that they can’t deliver then I would start to
worry.
22. It seems to me that the world has had a
shortage of silver, and an excess of paper money, ever since the U.S. left
off using silver in coinage, in 1964. But particularly, today, the
amount of paper money that exists seems more excessive than ever, with M3
at over $14 trillion, and silver seems to be in a particularly short
supply.
Are you concerned about these things as
well?
Futures Broker:
Yes I am. This is why I fundamentally
believe that silver should be heading higher in the long term. Short term
there is other matters that influence the silver market that are more
important then your question.
23. It seems to me that in
both the LBMA, and the NYMEX, that most silver sold am sold by
institutions or traders who are "naked short", meaning that the physical
silver to back the positions is not held by them. Do you think that
is a fair assumption, based on the statistics I've covered
above?
Futures Broker:
This is true for the lbma & nymex
but not correct regarding if the traders are really naked short. They
might sell on the Nymex but have the metal somewhere
else.
24. The Silver ETF claims to have over 253 million
ounces of silver backing it.
http://us.ishares.com/product_info/fund/overview/SLV.htm?qt=SLV
During
the time of its inception, silver at COMEX remained essentially unchanged,
and the silver price remained unchanged. Many people are wondering,
where this silver came from, how could so much be bought without moving up
the price, and if it really exists.
JP Morgan is the ETF custodian,
and JP Morgan is also rumored to be the largest silver short at the COMEX
holding down the price. That seems like a conflict of interest, to
say the least. JP Morgan also holds about 7 times the gross national
product of the USA in derivatives.
So, given that, would you trust the
ETF, or futures contracts more?
Futures Broker:
I would
trust the contracts more. This said I also think that the ETF is getting
its metal not from the Comex but directly from sources like J.M.
25. What do you think of private companies that offer
people "leveraged silver" programs? It seems to me that they are
mostly scammers, since they offer less leverage, on worse terms, than you
can get in the futures market. Is that your opinion as
well?
Futures Broker:
Yes why would someone want to trust a
small company at all when people are worried about the Nymex. Let’s face
it if the Nymex goes what position do you think that these companies will
be in?
26. If someone buys a silver futures contract
through your brokerage, could you help them take delivery?
Futures Broker:
I offer the silver at a less cost then
trying to take delivery. Asking a broker to deliver is like asking GM to
sell you a car. You would get a lot cheaper going to a local dealer then
buying directly from GM. There are many cases that going directly doesn’t
pay as they are too big to handle your order in an efficient
manner.
27. If someone expected silver prices to rise a
minimum of 25% annually from today, with the understanding that there
could be times lasting 1.5 years where no gains would take place, based on
those assumptions, suppose you had a client who was interested in buying
silver futures contracts or options with about $100,000 that they could
afford to lose, is there a particular strategy that you could
recommend?
Futures Broker:
This would be the time that
trading options would make sense. The person should buy the actual silver
& at any time that the option premium is greater then the 25% annually
they should sell the calls against the position.
28. What do you think of precious metals dealers who sell
physical silver but cannot deliver for up to, or exceeding, 60 days.
Do you feel that is reasonable or not, or is it like a futures
contract?
Futures Broker:
I think that this in NOT correct.
I understand that lets say you want to buy a car with a color that is not
in stock that you have to wait for it. In silver there are no special
orders so why does the dealer not have it in stock? Again I can even
understand if the dealer ran out that there might be a few days waiting
for the new order to arrive but to wait several weeks doesn’t add up.
29. I would like to thank you so much for your time and
help in answering these questions for me and my readers. Is there
anything you would like to add that you feel I did not cover, or that you
would like to say?
Futures Broker:
Again, thank you so much for taking the time. I and my readers
will really appreciate it.
About the company: Bullion Trading LLC accepts orders of any
size and processes orders using the spot price. Bullion Trading LLC only
sells from their active inventory and only stocks in-demand grain, coin
and bar products. Come visit us & see for yourself at:
http://www.bulliontradingllc.com/index.php
Sincerely,
Jason Hommel
In case you miss an email,
check the archives:
http://silverstockreport.com/ssrarchive.htm
www.bibleprophesy.org
You can buy silver at my auctions at www.seekbullion.com
Auctions end
M-Th, Sat, At 7PM, but you can place bids anytime,
24/7.
|