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How arbitrage in silver can make money for you

Silver futures trading on MCX exchange offers opportunity to make almost risk free profit through calendar spreads.

June 26, 2015 / 05:30 PM IST

Vikas Vaid

Arbitrage is taking advantage of price differentials of same commodity in two different markets. Globally silver futures is one of the most heavily traded and volatile commodity. In India silver futures are traded the most on MCX exchange platform which is the world’s third largest exchange in silver trading by volumes. Silver catches the interest of all types of market participants as its high volatility offers many opportunities for players to trade.

Low to virtually no risk arbitrage in MCX Silver through Calendar Spreads:

In MCX listed Silver – 30 Kilos contract size is a compulsory delivery contract and the expiry time difference between any two derivative contracts is of two months. The spread or difference between two contracts expands or contracts based on the future price trends perceived by the market.
In the event silver prices are expected to fall in the future the spread increases and decreases if market is bullish hinting that traders are willing to pay future premiums immediately as there may be supply shortages.
There arises an arbitrage opportunity when the spread widens by a margin where it becomes viable to buy silver resulting in delivery of near month expiry contract and sell the next month contract which will expire in the next two months.

Returns to the tune of 11-15% on an annualized basis have been seen after taking into account all costs incurred at the below mentioned stages:
•    Creating buy  and sell position in near month  and far month contract  respectively
•    Taking delivery of silver as a buyer and holding it in physical form till expiry of far month contract
•    Giving delivery of silver as a seller on the expiry of the far month contract

Real Market opportunities captured in the chart depicted below:

Scenario 1: Towards the end of April 2012, there was a spread of Rs 1700, for July Expiry
Scenario 2: Towards the end of September 2013, there was a spread of Rs 2048, for Dec Expiry

Snapshot of the costing involved in calendar spread arbitrage:


Risks to be considered:
•    Returns may vary if there is any error in executing the trades and spread captured is not viable for delivery arbitrage.
•    Delivery arbitrage requires VAT registration number of state in which silver is to be delivered and incomplete documentation and process flow may result in penalties
•    The arbitrage opportunity is not available frequently and arise in extreme market conditions typically bear market.

Author is product head - commodity and currency, Prabhudas Lilladher.

first published: Jun 26, 2015 05:30 pm

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