What are Gold Options?

June 10, 2022
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In simplest terms, gold options refer to option contracts with physical gold or gold futures as the underlying asset.

In the US, you can get gold options through the Chicago Mercantile Exchange (CME). Always check with your broker to see if you have access to the relevant markets.

An individual with a gold option has the right to keep either a long position or a short position in the underlying futures at the predetermined price. Remember that this is not a compulsion and only a right.

Call gold options mean that the holder can buy the metal at a set price before expiration.

Put options mean that the holder can sell the metal at a set price and is thus the opposite of a call option.

In both cases, keep in mind that the expiration date refers to the market close.

Gold options can be slightly complicated to grasp, but don’t fret as in this article we’ll tell you all the basics.

Understanding Gold Options and Calls and Puts

We learned that gold options are option contracts either having physical gold or futures on physical gold.

This contract is a mutual agreement between two parties who facilitate a transaction between a particular quantities of gold.

A term we need to know to apprehend regarding option contracts is "strike price".

Such contracts occur within what we call an expiration date”, after which the respected market closes.

This is the set and predetermined price that holders buy and sell at.

There are two main types of options contracts put options and call options.

Let's have a look at each of them individually:

Put Options

These allow the holder to sell a certain quantity of gold. It is not an obligation, and one can sell the gold at the strike price until the expiration date.

Holders prefer the put option more when the price of gold decreases because, in this way, they can sell the gold at a higher price.

If you buy a put option, you have the right but not the obligation to sell the gold. But if you sell a put, you have to purchase it at the set price without any second option.

Call Options

Bullish traders prefer gold call options. A holder has a right but not the obligation to buy some gold at the set price before the expiration date for call options.

In contrast, to put options, a call option becomes more admirable when the price of gold increases as holders can buy at a relatively lower price. Like put options, you can buy and sell a call. If you buy a call, you have the right but not the obligation to do so.

But if you sell a call, you most definitely have the sell the gold at the strike price, and you no longer have a choice. Both of these cases are relevant when the person on the other side of the contract demands a delivery within the date of expiry.

If a holder decides to not pick either of the four options – call buy or sell, but buy or sell, the contract will be useless.

What are Gold Options Used For?

We have discussed what gold options are but what is their true purpose?

Gold options enable traders and holders to predict and understand the future of gold in a market and calculate the potential risks.

Gold options help you understand the on going trend and whether it is upwards or downwards.

This might seem confusing as gold is known to be fairly stable. However, short-term fluctuations are still very likely.

In any case, short or long-term investment, gold options can help you be more confident in the future of your commodities.

How to Buy and Sell Gold Options?

Comparing gold options with other forms of gold purchases, we find that gold options are more complicated. This is because you cannot set up a vault or account and immediately begin trading.

There is a whole process behind buying and selling gold options.

The first step to take when buying gold options is to set up a margin brokerage account.

Ensure that the account is set up to work with both gold futures and options, as some brokers do not allow direct contact with gold option markets.

Some broker accounts will still have limitations, such as limits on stocks and EFTs.

The best thing to do would be to check with your broker and see what it allows and limits to avoid any confusion or frustration later on.

Gold Options vs Gold Futures

Gold futures are different from gold options in such a way that you do not need a contract in gold futures, and you can invest directly in gold.

Pick whichever option you want but below are some prominent advantages of gold options over gold futures:

1.    Lesser loss – the terms of gold options outline that you have the right but not the obligation to buy or sell. This gives the trader away to minimize losses because they can only invest in something premium.

2.     Extra leverage – a buyer gets added leverage as the payable price is lesser than gold futures. So, gold option positions require a lower margin to open a position in the market.

3.     More dynamic – gold options are more dynamic as they can be modified according to your portfolio and choice of strategies. In this way, gold options are more flexible, making it an excellent choice for investors wanting to run their investments in their way.

Final Thoughts

For beginners and advanced traders, pay attention to gold option markets because they can bring tremendous advantages.

We know that the value of gold is kept at a particular price, and it is then bought or sold accordingly. Therefore, always stay up-to-date with the current prices to guide your gold option investments in the right direction.

Gold options are significantly more advantageous than gold futures as well, making this an even better candidate to invest in.

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