Why Choose Gold Options?

10/16/2014 8:00 am EST

Focus: OPTIONS

Option trader Arthur Witte of ThomsettOptions.com outlines the benefits of purchasing gold options as compared to the expensive process of investing directly in the precious yellow metal.

Mutual funds with gold investments help spread the risk of an investor’s portfolio. However, people who are looking for a way to get exposure in the gold market without running the risk of losing too much money—should stocks sharply decline—should consider investing in options.

Options give you the right to buy or sell stocks at the fixed strike prices once a contract has been traded. If a gold stock costs $20 per share, that value will be the same even if a company’s per share value skyrockets to $45 in the next few days, so long as a contract remains open.

Options are great because they allow investors to avoid huge losses. If a stock appreciates in value, you may choose to buy the stock at the fixed strike of the contract, which is lower. Conversely, if the price of the stock depreciates, you will lose only the premium that you paid for the contract. Gold is a very expensive commodity and investing in it takes some serious amounts of money. Today, the precious yellow metal is priced at around $1,200 per ounce and buying a good delivery bar means purchasing a 400-ounce investment.

So far, the only disadvantage with gold options is that the stocks can’t be bought per ounce. The option controls 100 shares of stock. For example, Barrick Gold’s (ABX) shares now cost around $14 per share. So an options contract applies to $1,400 worth of stock. That’s almost the price of buying an actual ounce of physical gold, which can now be bought by the gram and stored in vaults overseas thanks to the advancements of gold investing.

Remember, each type of investment has its own set of pros and cons. Before engaging in any sort of investment, make sure that you’re fully aware of how it works.

By Arthur Witte of ThomsettOptions.com

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