Trading Gold Options

As the price of gold overtakes the dollar’s rise, trading gold options could be a good idea. In tough economic times there tends to be a flight to the dollar and a flight to gold when other currencies appear threatened. Part of the recent rise in the value of gold was masked by the rise of the dollar a couple of days ago. Nevertheless gold went up $12.20. Which way will gold go? Which way will the dollar go? Trading gold options will give the trader the option to buy or sell gold based investments but not an obligation. Gold mining stocks and gold funds offer the trader the opportunity for hedging their bets on gold with strategies such as a long straddle.

Gold mining stocks typically outperform gold bullion during an upswing in gold prices and may fall more dramatically when the price of gold drops. For gold bugs it is a matter of buying at the bottom and trying to get out at the top of the curve. The options trader has, well, more options. Buying puts on gold mining stock will allow the trader to profit from a downswing in the stock price and buying calls on the stock will allow him or her to profit from a price surge. Using a long straddle strategy the trader will buy both calls and puts on the same gold mining stocks with the same options expiration dates. Companies such as Barrick Gold, Newmont, Kinross Gold, Freeport McMoran, Anglo Gold Ashanti, Goldcorp, Newcrest Gold Fields, Harmony, Eldorado Gold, IAMGOLD, Lihir Gold, Centerra Gold, and Highland Gold are a short list of gold mining and exploration companies. Using a long straddle strategy in buying puts and calls on gold mining stocks will cost the trader the price of two premium but will offer the opportunity of a profit on either a rise or fall in stock price as the price of gold varies with the price of the dollar and world wide economic uncertainty.

Gold funds offer a similar opportunity in trading gold options. Because gold funds are more closely tied to the price of gold they may be amenable to different kinds of options trading than gold mining stocks. For example, if a trader believes that the price of gold will trade within a reasonably tight range over the next few months a short straddle strategy might be profitable. In this case the trader stands to earn the price of two premiums on his or her trades. However, it is important to realize that, although selling puts and calls tends to be more profitable over the long run, a short straddle opens the trader up to risk if the price of gold and the stock move substantially in either direction. It is because of the risk of substantial loss in selling puts and calls that most of this sort of options trading is done by large institutional investors with deep pockets. As usual we are not suggesting that one engage in trading gold options or avoid trading gold options. The point is to be aware of how market movement, investment uncertainty, and economic difficulties open the door to opportunity in trading options.