Options on Gold

http://www.options-trading-education.com/14354/options-on-gold/ Options on Gold The United States economy is in recovery and the price of gold is sinking. The US Federal Reserve plans to cut back on stimulus spending which is driving up interest rates and driving down the price of gold. In this climate options on gold are probably a better choice than directly buying or selling gold or equities based on the precious metal. If you want to trade options on gold you can trade options on gold bullion, gold mining stocks, or gold ETFs. Gold bullion is traded as a commodity so if you trade options on gold you are engaged in commodity options trading. You will trade futures on gold bullion. Trading Options on Gold Bullion Commodity futures options trading allows a trader to buy or sell puts or calls on gold bullion futures contracts. The buyer of a call contract pays for the right to purchase a contract but incurs no obligation to do so. He simply pays a fee to reserve the right to buy if the price is right any time before contract expiration. The buyer of a put contract pays for the right to sell a futures contract at any point before expiration. He is under no obligation to do so and will only exercise the contract if it is profitable. On the other hand sellers of puts and calls are paid to accept risk. They are obligated to sell or buy contracts if the buyer so chooses which is only when the buyer makes money and the seller loses. Trading gold options can be very profitable in a volatile market if the trader limits himself to purchasing calls or puts. It can also be profitable for sellers in a quiet market. In fact, over time, sellers tend to make more money than buyers of options contracts. The problem for sellers is that an occasional large loss can be catastrophic. As such selling options on gold is often the province or large investment houses or traders with deep pockets. Variations on Trading Options on Gold To alternatives to trading gold bullion are Gold based exchange traded funds and mining stocks. Traders can track the price of gold on exchange traded funds. These funds are traded like stocks and are constantly adjusted to match the price of gold bullion. Mining stocks prosper when gold goes up and suffer when the price of gold goes down. In both cases traders can trade options on gold via an alternative route. How to buy options on gold will depend upon the degree of leverage that a trader wishes to exercise and the degree of risk that he is willing to accept. ETFs track gold bullion very closely. Gold mining stocks tend to rise faster than gold in a bull market and fall more quickly in a bear market. An options trader can buy puts or buy calls on shares of a gold ETF or shares of a gold mining company. He will pay for the right to buy stock with calls or sell stock with puts. He will attempt to anticipate the price of gold and buy accordingly. If he does not believe that the price of gold will vary significantly he can sell puts or calls on gold ETFs or mining companies. If he is correct he will gain the premium paid for the options he sells. http://youtu.be/gXxX9U3KQUY

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