How to Buy Options on Gold
In a world rocked by recession and natural disasters many investors look to buy gold or profit by trading gold options. Learning how to buy options on gold can lead to both profitable trading and a reduction in investment risk. How to buy options on gold is to buy options on gold exchange traded funds or gold futures. How to buy options on gold is also to buy secondary options as futures on the COMEX.
These two means of trading options allow the trader to buy or sell puts and calls on either gold bullion futures or ETF stock shares. An ETF or exchange traded fund is a stock fund that typically owns gold and tries to track the price of gold bullion with its share price. The COMEX is a commodities exchange where traders can buy and sell futures on everything from agricultural products to energy products to precious metals. We will look at how to buy options on gold through an ETF first of all.
An options trader can buy puts or buy calls on shares of a gold ETF. 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 ETF stocks. If he is correct he will gain the premium paid for the options he sells. How to buy options on gold, and to do so profitably, requires that the investor have, or develop, a substantial fundamental knowledge of what drives the price of gold. Gold is the ultimate haven when currencies falter and chaos reigns.
The value of many commodities as measured in gold has not changed over the years while the price of virtually everything as measured in fiat currencies has risen. However, gold is also subject to market sentiment. Here is where knowing how to buy options on gold can be valuable. When to buy puts and when to buy calls is similar to trading stock options. Following both the fundamentals and technical aspects of the market are important.
Trading options offers the investor two advantages when compared to directly buying or selling gold bullion or gold stocks. Because one only pays the premium for the option he is not tying up large amounts of cash, having to take delivery of gold, or store gold. When the price of gold moves as expected the individual can exit the options contract without ever having to buy, sell, or own gold.
If the price of gold does not perform as expected the options buyer only loses the price of the option, unlike someone who buys gold and then sees it go down in price. Thus knowing how to buy options on gold affords the investor with both a degree of investment leverage and risk management not seen by those who buy and hold gold bullion or even those who buy and sell gold ETF stocks. How do options work on gold? They work the same as on other equities. Only the fundamentals vary.