One benefit of options is that you may use them to get a stake in gold for less money than you would by purchasing actual gold or gold futures. The Chicago Mercantile Exchange (CME) offers gold options in the United States, so if you’ve been wondering how to invest in gold, here’s a shorter-term and less capital-intensive method to do it.
- Gold options are options contracts in which the underlying product is either actual gold or gold futures.
- Call options on gold provide the contract holder the right to purchase the metal at a certain price before it expires, while put options give the contract holder the right to sell.
- Gold options are traded on the CME COMEX in the United States and employ gold futures (which represent 100 troy oz. of gold) as the underlying asset.
- Check with your broker to determine whether these markets are available via their platform.
Gold Calls and Puts
You may earn whether gold prices increase or decrease – or even remain constant. Do you think the price of gold will rise? Purchase a gold call option. A call option grants the right, but not the duty, to purchase gold at a given price for a specified period of time (expiry).The strike price is the price at which you may acquire gold. You earn if the price of gold increases over your strike price before the option expires. If the price of gold falls below your strike price at expiration, you lose the premium you paid for the option.
Put options provide the right, but not the responsibility, to sell gold at a certain price (strike price) for a predetermined period of time. If the gold price goes below the strike price, you benefit on the difference between the strike price and the current gold price (approximately).If the price of gold is higher than your strike price at the time of expiration, your option is worthless, and you lose the premium you paid for it.
If you believe the price of gold will remain stable for a lengthy period of time? To benefit from a sideways market, you may write a covered call or sell a straddle.
It is not required to keep your choice till it expires. It may be sold at any moment to lock in a profit or reduce a loss.
How to Trade Gold Options
To purchase gold options, traders must first open a margin brokerage account that permits them to trade futures and options, which can be obtained via providers such as Interactive Brokers, TDAmeritrade, and others. Not all brokers will provide you direct access to the gold options markets, and even if you do, you may be restricted to options on equities and ETFs (although you can use that ability to trade options on gold ETFs or mining stocks).
Check with your broker to determine whether they provide gold options and futures trading, and if so, what steps are necessary to get access to those markets.
Gold Options Specifications
Gold options are traded under the symbol “OG” on the Chicago Mercantile Exchange (CME) and its COMEX subsidiary. The options’ value is linked to the price of gold futures, which are also traded on the CME. There are forty unique strike prices available, each $5 above or below the current gold price. The farther the strike price is from the current gold price, the lower the premium paid for the option, but the less likely it will be profitable before expiration. There are over 20 expiration periods available, ranging from short-term to long-term.
Each option contract is worth one hundred ounces of gold. If an option costs $12, the amount paid for the option is $12 x 100 = $1200. Purchasing a gold futures contract that controls 100 ounces costs an initial margin of $7,150. Purchasing actual gold necessitates a complete financial investment for each ounce bought.
Gold options pricing and volume data may be accessed on the Quotes area of the CME website or via an options broker’s trading platform.
The Bottom Line
Calls and options provide traders with a less capital-intensive approach to benefit from gold uptrends and downtrends. If the option expires worthless, the sum paid for it (premium) is forfeited; risk is confined to this cost. Trading gold options necessitates a margin brokerage account with options access.
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