What’s a gold option?
Gold options use actual gold or gold futures as the underlying asset. Gold call options allow holders to acquire bullion at a specified price at a future date, while put options allow holders to sell bullion at a defined price level. Option agreement parameters include a defined delivery date, quantity, and strike price.
Understand Gold Options
Gold options involve physical gold or futures on physical gold as the underlying asset. Gold options contracts represent a prospective transaction between two parties for a specific amount. The contract specifies a strike price and expiration date. Put-and-call options are the leading option contracts. Participants can buy or sell the call and put, resulting in four varieties.
Gold Option Types
- Call gold options allow holders to purchase a particular quantity of gold at the strike price until the expiration date without obligation. Call options become more lucrative as gold prices rise since they lock in a lower purchasing price. Buying the call gives you the right, but not the obligation, to buy gold. If you sell the call, you must sell the gold at the set price if the other party demands delivery before the expiration date.
- Gold put options allow the owner to sell a set amount of gold at the strike price until the expiration date, without obligation. As gold prices fall, put options become more desirable since they lock in a higher sale price. Buying the put gives you the right to sell gold, but not the duty. Selling a put requires you to buy gold from the opposite party inside the contract at the set price.
Should call or put option holders not exercise their rights, the contract would expire worthless.
Gold futures vs. options
Similar to gold futures contracts, gold options have a fixed price, expiration date, and dollar amount. A futures contract requires the buyer or seller to fulfill the agreed-upon gold amount and price. An investor with a gold option has the right, but not the responsibility, to claim the appropriate position, depending on whether they hold the call or put option.
Gold Options Contract Details
Global derivatives markets handle gold option contracts. Investors in the U.S. can access gold options listed on COMEX.
COMEX is the primary futures and options market for gold, silver, copper, and aluminum. Since 1994, COMEX has been the section responsible for metals trading after merging with the New York Mercantile Exchange (NYMEX).COMEX and NYMEX are now part of the Chicago Mercantile Exchange (CME).
COMEX gold options are cash-settled and employ gold futures instead of natural gold. Gold futures contracts are 100 troy ounces and need physical delivery if not closed out. Gold option losses can be considerable.
Gold Option Exercise Conditions
An investor would only execute gold option rights if market circumstances were favorable, as with other options.
The investor will gain from executing their call option if gold trades at a price much higher than the strike price. The investor can rapidly sell the gold for profit on the open market. If gold trades around the strike price, investors may break even or lose money after considering the original cost of the option.
How do I buy gold options?
U.S. gold options are accessible through the Chicago Mercantile Exchange (CME). Gold futures underpin these option transactions. Trading gold options requires a margin brokerage account with options markets. Contact your broker to inquire about options trading or search for an account elsewhere.
Types of Gold Options
Gold call options give the contract holder the right but not the obligation to acquire the metal at a specified price before expiration. Call options lock in a lower buying price when gold rises, increasing its value. Put options allow the contract holder to sell gold at a specified level before expiration. Lower gold prices make options more desirable since they lock in a higher selling price.
Pros and Cons of the Gold Option
Gold options allow traders to speculate on gold with less money than gold futures or natural metals. Options can cause huge losses if gold prices fall.
The Verdict
Gold options allow the holder to purchase or sell gold at a fixed price until the contract expires. Call option holders may buy gold at a specific price, while put option holders can sell at a certain level. Gold options trading requires a margin brokerage account with options markets.
Conclusion
- Gold options use actual gold or gold futures as their underlying instrument.
- Call options on gold allow the contract holder to acquire the metal at a specified price before expiration.
- In contrast, put options allow selling at a predetermined price.
- The CME COMEX lists U.S. gold options that employ 100 troy ounces of gold futures.
