How to Buy Gold in Options
Private investors have two options for purchasing gold options: they can buy a secondary option on the New York Mercantile Exchange within the Commodity Exchange (COMEX) division or they can open a private account with a bullion bank, which requires a substantial minimum balance and fulfillment of all due diligence. For most investors, purchasing secondary options will be the most cost-effective method for trading in gold options.
Other People Are Reading
Instructions
-
-
1
Contact your broker or use online brokerage software to purchase a gold option. Options come in two varieties: put and call. A put option gives the holder the right (but not the obligation) to purchase gold at a particular price during the valid dates of the option. A call option gives the holder the right to sell gold. The date on an option is called the "expiration time" and the price is referred to as the "strike price." A savvy investor will purchase a gold put option if they believe the price of gold will rise above the strike price of the option before its expiration date. Similarly, an investor will purchase a gold call option if they believe the price of gold will decline below the strike price of the option before its expiration date.
-
2
Purchase the option at the strike price and expiration date that fits your expectations for the price movements of gold. Gold options are priced directly off the price of gold futures contracts, which makes them a fairly safe option relative to investing in gold mining stocks, which can be affected by politics and the fortunes of particular gold mines. Gold futures contracts are priced directly based on what speculators expect the spot price of gold to be on the delivery date of the security. Futures contracts obligate the holder to purchase the underlying commodity at a certain date for a certain price. For example, a gold futures contract costing $100,000 with an delivery date of May 15, 2012 would require the holder to purchase 1,000 troy ounces of gold for $100,000 on May 15, 2012.
-
-
3
Trade the option when it becomes favorable, or exercise your rights to buy or sell the gold futures contract at the strike price. The prices of options rise and fall depending on how profitable the option is rather than the price movements in the underlying commodity. Very few investors will actually want to purchase a gold futures contract because of the high expense, risk and difficulty of storing the commodity. Options are much less expensive, less risky and easier to trade than futures.
-
4
Consider purchasing options for a gold exchange-traded fund (ETF) instead of purchasing options for the underlying commodity. It will be simpler to execute the option relative to using it to purchase a gold futures contract. These ETFs shift according to the gold price similar to ordinary gold options, but are traded on regular markets as equities.
-
1
