Gold Options Explained

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Gold Options Explained

Gold options are option contracts in which the underlying asset is a gold futures contract.

The holder of a gold option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying gold futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Gold Option Exchanges

Gold option contracts are available for trading at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gold option prices are quoted in dollars and cents per ounce and their underlying futures are traded in lots of 100 troy ounces of gold.

TOCOM Gold options are traded in contract sizes of 1000 grams (32.15 troy ounces) and their prices are quoted in yen per gram.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
NYMEX Gold Options 100 oz
(Full Contract Specs)
American Calls | Puts
TOCOM Gold Options 1000 gm
(Full Contract Specs)
American Calls | Puts

Call and Put Options

Options are divided into two classes – calls and puts. Gold call options are purchased by traders who are bullish about gold prices. Traders who believe that gold prices will fall can buy gold put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Gold Options vs. Gold Futures

Additional Leverage

Limit Potential Losses

As gold options only grant the right but not the obligation to assume the underlying gold futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

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Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a gold option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Gold Futures & Options Trading

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How To Buy Gold Options

An advantage of options is that you can use gold options to attain a position in gold for less up-front capital than buying physical gold or gold futures. Gold options are available in the U.S. 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.

Key Takeaways

  • Gold options are options contracts that utilize either physical gold or gold futures as their underlying instrument.
  • Call options on gold give the contract holder the right to buy the metal at a pre-set price before it expires, and put options the right to sell.
  • Gold options trading in the U.S. are listed on the CME COMEX and use gold futures (which in turn represent 100 troy oz. of gold) as its underlying asset.
  • Check with your broker to see if you have access to these markets through their platform.

Gold Calls and Puts

You can use options to profit whether gold prices rise or fall – or even stays the same. 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.

If you think the price of gold will not move very much for an extended period? You can write a covered call or sell a straddle to profit off of a sideways market.

It is not necessary to hold your option till expiry. Sell it at any time to lock in a profit or minimize a loss.

How to Trade Gold Options

To buy gold options traders need a margin brokerage account which allows trading in futures and options, provided by services such as Interactive Brokers, TD Ameritrade and others. Not all brokers will allow direct access to gold options markets, even with options trading you may be limited to options on stocks and ETFs (although you can use that ability to trade options on gold ETFs or mining stocks).

Check with your broker to see if they offer trading on gold options and futures, and if so what is required to get access to those markets.

Gold Options Specifications

Gold options are cleared through the Chicago Mercantile Exchange (CME) and its COMEX unit, trading under the symbol heading “OG”. The value of the options is tied to the price of gold futures, which also trade on the CME. 40 individual strike prices are offered, in $5 increments above the below the 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 = $1200. 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.

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.

Gold Options Explained

Gold options are option contracts in which the underlying asset is not Gold Bullion but a gold futures contract. You can trade gold options in the same way as you would a traditional securities option, so both calls and puts are available.

As usual with options you’re under no obligation to buy the futures contract at the strike price. If you don’t wish to exercise the option you can simply let it expire.

Where Are Gold Options Traded?

Gold option contracts are traded on both the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM).

NYMEX Gold option prices are quoted in dollars and cents per ounce and their underlying futures are traded in lots of 100 troy ounces of gold.

TOCOM Gold options are traded in contract sizes of 1000 grams (32.15 troy ounces) and their prices are quoted in yen per gram.

Call and Put Options

Gold Options are available in both calls and puts, calls should be bought buy traders who think that the overall trend is bullish. Traders who believe that the overall trend is bearish should buy put options instead.

Calls and puts can also be combined together by simultaneously buying and selling options to create what’s called a spread.

How to Trade Gold Options

Let’s say that a near-month NYMEX Gold futures contract is trading at $114.00 per ounce. A NYMEX Gold put option (bearish) with the same expiration and a strike price of $100.00 is being priced at $1.30/oz. Since each underlying NYMEX Gold futures contract represents 100 troy ounces of gold, the options premium you need to pay to own the put option is $130.00.

Upon expiration, the price of the underlying gold futures has fallen by 15% and is now trading at $96.90 per ounce. At this price, your put option is now in the money.

If you exercise your put option, you get to assume a short position in the underlying gold futures market at a strike price of $100.00. That means you get to sell 100 ounces of gold at $100.00/oz upon delivery.

If you wanted to take profit from the trade you’d need to enter an offsetting long futures position for one contract of the underlying gold futures at the market price of $96.90 per ounce, resulting in a net profit of $3.10/oz. Since each NYMEX Gold put option covers 100/oz of gold, your gross profit from the long put position is $310.00. After deducting the initial option premium of $130.00 your net profit from the long put option will be $180.00.

In reality you wouldn’t wait to exercise the put option to realize your profit. You could simply close out the position early by selling the put back to the market.

The above example doesn’t include any commissions that you’d have to pay your broker to execute the options trade. These commissions vary from broker to broker but usually amount to around $10 to $20 per trade.

Gold Options vs. Gold Futures

Looking at the above example you might be wondering if it would be easier to just trade the underlying Gold futures and forget about options altogether. But options have significant advantages over futures, including additional leverage and lower risk.

For instance if you were to buy gold options you’d gain additional leverage over the equivalent futures contract, since the premium payable is typically much lower than the margin required to open a position in the underlying gold futures market.

And since you’re under no obligation to buy the futures contract upon expiry, your maximum potential loss is limited to the price you paid to purchase the option. If you purchased the futures outright your potential loss would be unlimited.

Conclusion

As you can see if you’re already used to trading options, Gold options are fairly straight forward. But if you’re new to options, you might be feeling a little confused. The best thing for you to do is sign-up for an account with optionsXpress; once approved they’ll give you a virtual $25,000 to play with.

Use what you’ve learned here and carry out a few test trades. It won’t take you long before you’re up to speed. You’ll also find a whole lot more training resources and tutorials to help take your trading to the next level.

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