What Are Gold Options and How to Buy Gold Options

If you have qualms about buying physical gold, it may be time to consider gold options. After all, there are a wide variety of ways and formats to purchase gold in—it’s about finding the right choice for you and your lifestyle. Gold options are a stable way to make your first investment in gold, and depending on your position in the deal, allow you to walk away relatively risk-free if the terms no longer seem agreeable.

Still, gold options can be complicated to understand for those who are new to the gold investment game, or just new to the market of gold options. We’ve compiled a primer on what to know about gold options for those looking to try it out.

What Are Gold Options?

Gold options are where the asset in question is a gold futures contract. Essentially the agreement gives the buyer the right (but, vitally, not the obligation) to buy the futures contract.

In other words, a gold options contract allows two parties to agree on the terms of a transaction of gold in advance, even though the actual exchange happens later (if at all). In the options agreement, details like delivery date, quantity, and strike price are all pre-agreed. If the date passes, then the strike price expires.

Gold Options Puts and Calls

Not all gold options are the same, however. Although every gold option contract represents an agreement between a buyer and a seller, the exact mechanics depend on the circumstances of the sale, which get divided into two categories: calls and puts.

Call Gold Options

Call gold options happen when a trader expects an increased price in the gold markets. A gold call gives the holder the ability to purchase gold bullion at a future date on an agreed-upon price.

Call gold options are favorable to buyers, who retain their right to purchase the gold but are not obligated to do so. Sellers, meanwhile, are locked in and must sell the gold at the agreed-upon price if a seller commits before the expiration date. Because call gold options lock in buyers to a lower price, the call option gets valuable when the value of gold rises.

Put Gold Options

The put options allow someone to sell their bullion at a set price in the future.

Puts are the inverse of their call counterparts. They are purchased when a fall in the gold market is expected and becomes more valuable as gold decreases in value (since the price was already determined at a higher price). If the value of the gold were to fall below the strike price, then the put holder would earn the difference, theoretically turning a tidy profit.

By buying the put, you again have the option but are not committed to selling the gold. Once you sell a put, you are obligated and have to purchase the gold from the seller.

In either case, there is still the option for the contract to expire and become worthless if the person who holds either the call or put opts not to complete the transaction.

What’s the Use of Gold Options?

Just like other forms of investing, gold options provide the ability to both hedge risk and speculate about the future of the market. Your investment in a call or put gold option allows you the ability to fend off risk on your investment choices.

Additionally, you’re speculating on whether you think the price valuation of gold will trend up or down. Although gold is a relatively stable investment over time, the price of gold does still fluctuate in the short term, volleying between prices. Whether you invest in gold as a long (the call gold option) or short (the put gold option) option indicates how confident you are in the commodity’s ability to hold its value in the future as a short- and long-term investment.

As secure as gold is, there’s no such thing as a sure thing when it comes to investing. Every purchase of a stock or commodity represents speculation and vote of support (at least for however long you plan on keeping that stock). With gold’s stability, gold options represent a way to even further limit risk while still maintaining upside earnings potential.

How Do You Buy and Trade Gold Options?

man with coins thinking how to trade gold options
Gold option contracts are more complicated than other gold purchases. You cannot merely set up a vault or account and start trading.

Gold option contracts are traded over the New York Mercantile Exchange and the Tokyo Commodity Exchange. The former is quoted in dollars, with the underlying futures trading lots of 100 troy ounces of gold. Tokyo Commodity Exchange trades contract sizes in 1,000 grams (or approximately 32.15 troy ounces) quoted in yen.

To buy gold options, you’ll need a margin brokerage account. Also, you’ll have to ensure your account is set up for futures and options since not all brokers allow direct access to gold options markets.

Even if you can set up an account with futures and options, you may still be limited. Many accounts restrict traders to options on stocks or ETFs. Those possibilities may allow you to deal with specific gold portfolios like gold ETFs. Still, it won’t always provide as much freedom as those interested in gold options may want.

It’s best to check with your broker or the trader you’re dealing with to see if they allow for gold options and futures, and what you’ll need to access those markets. If you need help, our staff can also help you better understand the gold options market and what it requires of traders.

Advantages of Gold Options vs. Gold Futures

If you’ve been looking into gold options, you may have heard of gold futures. Essentially this would mean bypassing the option contract part of the process and investing directly in gold futures.

Your perspective on whether you prefer just to buy the underlying gold futures outright will depend on whether you think gold options provide additional benefits. Gold options detractors find that they sometimes waste assets which may expire and become worthless.

There are some benefits cited by those who like gold options, as detailed below.

Allows for Extra Leverage

A buyer gains additional leverage in a gold options contract because the premium payable is usually lower than it is to keep a comparatively open position with gold futures.

Terms Help Limit Losses

The terms of gold options very clearly outline that the buyer has no obligation to purchase the underlying gold futures of the contract. Until the date of expiration, gold options provide the buyer merely the right to assume the gold futures, restricting the number of losses a gold options deal takes on.

Allows for a More Dynamic Portfolio

Because of the nature of gold options, they can be molded around various portfolio strategies and approaches. This makes for a more flexible approach with your investment, allowing the investor to take on only as much volatility, cost, and timelines that they feel comfortable.

Exactly what’s best for your portfolio will vary, just like a lot of gold investment choices. But overall, gold options provide many of the same benefits of the underlying gold futures they represent, only with a little more breathing room.

Essential Tips for Gold Options Investing

Unlike other types of gold investing, gold options require a more elegant touch. Among the key pieces of advice we can give to gold options beginners is that paying attention to the market is vital with gold options.

The value of gold is always dictated by current affairs and the state of the market. While gold has risen over the long-term for decades, staying informed on how the economy is shifting in the short-term can help inform your trades and guide your gold options.

The best way to learn? Start slow. Deal with smaller amounts in the beginning and get a feel for the market. If you need to, set a loss limit (and then stick to it).

Trusted Advice from Professionals

As you might’ve surmised from this article, gold options are not necessarily for the faint of heart. They represent a more active investment, one where it pays to go into it by knowing what you want to accomplish and the best strategies to do it. Even if gold options are just one part of your investment portfolio, you should still approach them with complete competence.

That’s why it’s so important to work with professionals who can help you make sense of the gold options market and the gold futures they represent. If you feel like you need a little bit of extra assistance, don’t panic. Just because you’re coming from the perspective of a newbie doesn’t mean you have to break into the market that way.

Our friendly staff is available to help walk you through every requirement for investing in gold options. They are knowledgeable about all gold investment options and can help take you from novice to advanced in no time. Don’t hesitate to reach out today and get started on your gold options plan.

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