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Investing in gold has long been considered one of the most reliable investments because of its historical use as a store of value. Because of that, investors often use gold as a safe haven during periods of economic uncertainty. By trading gold options, you can gain exposure to the precious metal and diversify your portfolio without having to purchase physical gold.
In simple terms, options give investors the right — but not the obligation — to buy and sell an underlying asset at a specific price or time. However, trading options can be complex and risky. They’re not suitable for many investors, so it's essential to have a solid understanding of how they work before investing.
In this article, we’ll discuss the ins and outs of gold options, their advantages and disadvantages as well as how to trade them.
Table of contents
- What are gold options?
- How to trade gold options
- Gold options vs. gold futures
- Gold options FAQs
- Summary of how to buy gold options
What are gold options?
Gold options are financial derivatives that give traders the opportunity to make short- and medium-term profits from buying or selling gold at a specific price (i.e., the strike price) on or before a specific date (i.e., the expiration). Gold options are used to speculate on the future price of gold, and they offer the opportunity to profit from the rise or fall of gold’s value.
Advantages of gold options
One of the advantages of gold options is that they have the potential to produce sizable returns if your price speculations are correct. They can also provide exposure to gold with a smaller initial investment than is required when purchasing physical gold, gold-leveraged ETFs or gold miner stocks.
Another advantage of trading gold options is that you can use them to hedge against price volatility in the gold market, which can be particularly useful for investors looking to protect their portfolios. Gold options offer traders flexibility, as they can be bought or sold at any time before the expiration.
Disadvantages of gold options
One of the main disadvantages of gold options is that they can be complex and challenging to understand, particularly for novice investors. Options trading involves several variables, including the strike price and the implied volatility of the underlying asset, all of which can affect the option's value. Options also have a limited lifespan and expire on a precise date, so they’re not ideal for long-term investors.
Because the price of gold can change at any time, trading options tied to the precious metal is more complex and carries greater risk than trading other types of equities leveraged to gold. It’s also worth noting that not all brokers offer gold options trading.
How to trade gold options
Gold options can be bought or sold through brokerage accounts that allow options trading, and like other options, they come in two forms: call options and put options. To trade gold options, investors must first understand the difference between call options and put options.
Gold call options
A gold call option gives you the right, but not the obligation, to purchase a set amount of gold (usually 100 ounces) at a strike price before the expiration. You can purchase a gold call option if you think the price of gold will increase.
If the price of gold rises above the strike price before the expiration, the call is considered “in the money” (ITM) and you can either sell it or exercise the option and buy gold at a lower price than the current market price. However, if the price doesn’t rise above the strike price before expiration, the call is considered “out of the money” (OTM) and you may have to let the contract expire worthless and lose the money you used to initially purchase it.
Gold put options
A gold put option gives you the right, but not the obligation, to sell a set amount of gold at a strike price before the expiration. You can purchase a gold put option if you think the price of gold will decrease.
If the price of gold decreases below the strike price before the expiration, the put is ITM and you can either sell or exercise it. On the other hand, if the price doesn’t decrease, the put is OTM and you may have to let the contract expire worthless and lose the money you used to initially purchase it.
One reason trading gold options carries elevated risk is because you are selling the right to buy or sell the asset to another investor. If a buyer exercises their option, you could be required to buy or sell the gold at a specific price, which could result in a loss. Consider consulting a financial advisor before investing in gold options to help determine if it’s suitable for you.
Gold options vs. gold futures
Gold futures are contracts that require the buyer to purchase a specified amount of gold at a fixed price and time in the future. They differ from gold options because an investor who buys options is not required to buy or sell the gold. Rather, they have the right to.
One of the advantages of gold futures is that they are standardized contracts that are traded on a regulated exchange, which can help reduce counterparty risk. Still, both types of investments can be risky for investors, especially those who are new to derivatives.
Futures contracts require traders to post margin (typically 3% to 10% of the underlying contract amount) as collateral to cover potential losses, which can be a significant financial commitment. Moreover, futures trading is subject to margin calls, which occur when a trader's margin account balance decreases below the minimum required amount. Margin calls may force traders to deposit additional funds or liquidate existing positions, both of which can be costly.
Another drawback of gold futures is the high level of leverage involved — the ability to control a large contract with a relatively small amount of capital. This can amplify gains and losses, so it also increases risk.
Gold options FAQs
How do you trade gold options?
At what time of day do gold options expire?
Summary of how to buy gold options
Investing in gold options can help you gain exposure to gold and diversify your portfolio without having to purchase the physical metal. Gold options provide the right, but not the obligation, to buy or sell gold at a specific price on or before the expiration. Before trading gold options, consider factors like the amount you want to trade, your overall investment goals and your risk tolerance.
If you’re bullish on the price of gold, you can purchase gold call options. If you’re bearish on the price of gold, you can purchase gold put options. In either instance, you can profit if the price changes the way you speculated it would. If it doesn’t, you could lose the money you paid for the contract. Be mindful that selling options exposes you to higher risk.
Beyond gold options, you can invest in gold by buying the precious metal in the form of gold bars, gold coins or collectibles. However, buying physical gold comes with additional costs for storage and insurance.
Ultimately, the best way to buy gold depends on your circumstances and investment goals. It’s always a good idea to discuss your situation and plan with a financial advisor before making any investment decisions.