Posted on February 15, 2021
You have many choices when it comes to investing in gold. In addition to buying physical gold, you can invest in gold futures contracts as well as options on gold futures contracts. The content below will explore what it means to invest in options on gold futures.
A gold option is an option that features a gold futures contract. If you hold a gold future option, you have the right to take a long position if you have a call option. Conversely, you can take a short position if you have a put option on the underlying gold futures at strike price, which is the price at which you can buy gold. That right no longer exists when an option expires after the market closes on the option's expiration date .
You can earn money on gold options whether the gold prices fall or rise, or even earn money if the price stays the same, when you buy gold options. Keep in mind that you do not need to hold onto an option until expiry. You can sell an option at any time to lock in your profit or to minimize a loss.
You can find gold options prices as well as volume data in the Quotes section of the Chicago Mercantile Exchange, or CME, website .
If you think the price of gold is going to go up, you should purchase a call option. This type of option gives you the right to buy at a specific price until expiry, which is just a set period of time. You don't have an obligation to buy.
You will make a profit if the price of gold goes above the strike price before the point at which your option expires. On the other hand, if the gold price is below the strike price at the time of expiry, you will lose the amount you paid for your option. This amount is known as the premium , .
A put option gives you the right, but not an obligation, to sell at a strike price for a set period of time.
You earn money on a put option if that gold price goes below the strike price. When this happens, a holder of a put option gets the difference between the strike price and the price of gold at that moment. However, if the gold prices go above the strike price when your option expires, the option is worth nothing. You then lose the premium that you paid to get the option , .
You can still earn money on gold options when you believe gold option prices are not going to move much for a longer period of time. You can either write a covered call, or you can sell a straddle to earn a profit when there's a sideways market .
Options trading a popular strategy that many professional traders use. You can also create more complex strategies, called spreads, by both selling and buying options at the same time. Buying options on gold futures gives investors a way to invest in gold without buying a physical commodity or purchasing a gold futures contract outright.
Amid fears of the COVID-19 pandemic, many investors are turning to gold. This includes buying gold options .
Options on gold futures offer both advantages and disadvantages when compared to either outright purchase of underlying gold futures or buying physical gold .
Compared to outright underlying gold futures purchases, buying gold options:
Compared to buying the physical commodity, buying gold futures options offers the following:
Compared to outright underlying gold futures purchases, gold options:
Compared to buying the physical commodity, buying gold futures options:
Investing in options on gold futures gives you another way to invest in gold.
1. The Options Guide. 'Gold Options Explained,' https://www.theoptionsguide.com/gold-options.aspx. Accessed September 20, 2020.
2. Investopedia. 'How To Buy Gold Options,' https://www.investopedia.com/articles/active-trading/052014/how-buy-gold-options.asp. Accessed September 20, 2020.
3. CNBC. 'Options trader bets $2 million on a monster rally for gold,' https://www.cnbc.com/2020/03/03/options-trader-bets-2-million-on-a-monster-rally-for-gold.html. Accessed September 20, 2020.