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A “Golden” Option Strategy
06/02/2014 8:00 am EST
Gold options are available in the US through the Chicago Mercantile Exchange (CME), so if you've wondered how to invest in gold, here's a shorter-term and less capital intensive way to do it.
How to Invest in Gold: Calls and Puts
Use options to profit whether gold prices rise or fall. Believe the price of gold will rise? Buy a gold call option. A call option gives the right, but not the obligation, to buy gold at a specific price for a certain amount of time (expiry). The price you can buy gold at is called the strike price. If the price of gold rises above your strike price before the option expires, you make a profit. If the price of gold is below your strike price at expiry, you lose what you paid for the option, called the premium.
Put options give the right, but not the obligation, to sell gold at a specific price (strike price) for a certain amount of time. If the price of gold falls below the strike price, you reap a profit of the difference between the strike price and current gold price (approximately). If the price of gold is above your strike price at expiry, your option is worthless and you lose the premium you paid for the option.
It is not necessary to hold your option till expiry. Sell it at any time to lock in a profit or minimize a loss.
Gold Options Specifications
Gold options are cleared through the CME, trading under the symbol OG. The value of the options is tied to the price of gold futures, which also trade on the CME. 40 strike prices are offered, in $5 increments above the below the current gold price. The further the strike price from the current gold price, the cheaper the premium paid for the option, but the less chance there is that the option will be profitable before expiry. There are more than 20 expiry times to choose from, ranging from short-term to long-term.
Each option contract controls 100 ounces of gold. If the cost of an option is $12, then the amount paid for the option is $12 x 100 = $1,200. Buying a gold futures contract which controls 100 ounces requires $7,150 in initial margin. Buying physical gold requires the full cash outlay for each ounce purchased.
To buy gold options traders need a margin brokerage account which allows trading in futures and options, provided by Interactive Brokers, TD Ameritrade, and others.
Gold options prices and volume data are found in the Quotes section of the CME website, or through the trading platform provided by an options broker.
The Bottom Line
Calls and puts allow traders a less capital intensive way to profit from gold uptrends or downtrends respectively. If the option expires worthless, the amount paid (premium) for the option is lost; risk is limited to this cost. Trading gold options requires a margin brokerage account with access to options.
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