I would be selling calls on SLV.  If the contract is exercised, I would pay from my liquid cash savings, then sell my physical silver to recover the "loss".

It looks like I would have to buy out to Feb17 or Mar17 because the premium is pretty low on anything closer.  Especially at the strike price I would prefer to sell at.  

Also, I'm guessing I would have to keep the cash to cover an exercised option in a trading account...?   I'm very new to options trading, and I'm not sure how that works.

Just dreaming up ways to pull in a little more income.  Is this stupid?

I have never been a fan of hoarding physical representation of our currency. I would hold on to it, wait till the market cycles and sell it.

Lets just say in an emergency, a burger thats worth a dollar, now sells for $10, how do you barter the price of that with loose gold or silver. They represent some currency value, which makes them theoretically just as worthless?

Where is your physical silver and through whom are you trading options?

While what you are trying to do is possible, it's not "recognized" as such unless the physical silver is being held at the same brokerage house through which you would be trading the options.

Otherwise, as you state, the brokerage is going to treat it as a margin trade unless you have the cash set aside to cover the calls.

As for stupid/dreaming, there are much better ways to generate more income:  buy a high dividend stock like JNJ or MCD or whatever and sell calls on that.  It's pretty easy $ when the market is in a relatively narrow trading range like it has been for many months/years.  Worst case is you sell your stock at whatever price you chose to sell it at.

Silver is in deposit boxes locally.  And I'm presently playing with Option House's paper trade.

I agree with you on the high dividend stock, and I plan to use covered calls along with other options stuff like condors.  However, my silver stash is just sitting there doing nothing. I figure I could make a little money off it in the meantime.  Even if I have to go through the hassle of storing money at the broker.  Or maybe I could open a line of credit to cover the exercised call for a few days while I sell the physical silver and transfer the money...?  I guess I'll have to read all of their fine print.

There just isn't much premium in slv right now. If you go out and sell calls in 2017, you'll be waiting a long time for the decay to happen. As was hit on already, you'll have to either put up the margin for being short a naked call or spread it off. The brokerage won't recognize your physical silver as a hedge. The other issue is the difference between spot price and what you can get for your physical silver.  There will be some slippage involved there that wouldn't happen if you were just long slv selling calls against it.