Deciphering Gold Options
04/21/2014 8:00 am EST
JW Jones of Options Trading Signals details what gold options are, how they work, and how they differ from gold futures contract.
Gold options allow investors to buy or sell gold bullion at a future date (date of delivery) at a set price. The quantity of gold, date of delivery, and price are all preset. As the name implies, trading gold with options is merely an option, not a requirement, so investors are not obliged to either buy or sell gold at the end of a contract.
Options shouldn’t be confused with futures contracts. While options and futures work the same way (both having a pre-determined price and expiration), the futures contract is an obligation and therefore should be upheld. The difference between gold options and gold futures will be further explained below.
Gold Option Exchanges
Investors who wish to deal in gold options can purchase contracts at the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). NYMEX gold options are traded per 100 troy ounces of gold, while TOCOM gold options are traded per 1,000 grams of gold. These numbers are the minimum purchase requirements before a contract can be made and cannot be lowered due to any circumstances.
Call and Put Options
With gold options, investors can partake in two different trading classes called calls and puts. It’s technically just buying and selling. Calls are made by investors who think that gold prices will be bullish in the future. On the other hand, puts are made when gold investors predict that gold prices will be bearish. Having good fundamental and technical analysis skills are necessary in order to make a decent call and put decisions. Technical analysis is examining patterns on price charts in order to make a good inference on gold’s price movements. For closer inspection on this, refer to Bullion Vault’s live price graph to see today’s gold price patterns. However, fundamental analysis is aided by being up-to-date with the news and current events that can affect the price movements of gold.
Gold Options vs. Gold Futures
Apart from the option/obligation explanation, there are other things that differentiate gold options from options. Here are some of them:
Investment losses in futures trading can be felt immediately due to their margin requirements. It’s also possible for traders to lose more money than they intended because of this. Although, options buyers know exactly what they’re getting. Before investing with options, they know how much they’re getting in the end and their maximum possible loss.
It’s easier to gain leverage in options because the premium payable in it is much lower than the minimum required from investors to deal in underlying gold futures. Having leverage may induce reduced profits but at least it won’t be as big as when having borrowed funds in futures.
By JW Jones of Options Trading Signals