Gold futures options are a form of investing in gold. With gold futures trading, an investor trades gold futures contracts or gold futures options as commodities. Ever since the first gold futures contract was offered by the Winnipeg Commodity Exchange in 1972, futures trading has played a role in the gold market. The very first exchange-mediated gold futures options, which are options to buy or sell futures contracts, were offered in 1982 by COMEX. Gold futures are traded at two primary global exchanges: Commodity Exchange, Inc (COMEX) in New York, and the Tokyo Commodity Exchange (TOCOM) in Tokyo.
How Gold Futures Options Work
With gold futures contracts, investors contract to buy or sell gold at a certain quantity for a specific, pre-set price at a planned future date. Gold futures are relatively liquid because they are standardized this way.
The “option” part of gold futures options means that the buyer of the option may buy or sell the underlying futures contract within a specified time period (up to the expiration date) for a specified price, called the “strike price.” If bought at an at-the-money strike price, the option is purchased with a strike price equivalent to the current market price of the gold futures contract.
Put Options and Call Options Explained
With the trading of gold futures options, an investor is essentially betting on the future price of gold. If the investor expects the price to go up, he or she can buy a “call” option. Call options offer the buyer the chance to buy the futures contract later at a set price, ideally below that of the current futures market.
If the investor expects the price of gold futures to fall, he or she can buy a “put” option. Put options give investors the optional right to sell the futures contract to the buyers, ideally at a premium price.
Is There Any Physical “Gold” in Gold Futures?
Trading gold futures securities happens primarily on paper: most of the gold bought or sold in the futures market never moves. Gold futures are typically traded by “speculators,” investors who buy or sell gold futures but aren’t interested in the physical gold, versus “hedgers,” who do value the gold itself as an investment. Additionally, those wanting primarily to invest in physical gold might opt to invest in gold bullion.
What Does it Mean to Offset a Futures Contract?
The futures contract transaction will not be completed – that is, nobody will actually buy the gold – if the contract is “offset” by the involved parties. Offsetting is the effective voiding of the contract by changing the terms of the commitment in a trading transaction. For example, if the investor does buy a put option to sell, the contract can be offset if the buyer then buys a gold futures option below the strike price.
Futures and Options Basics: Gold Futures Contracts vs. Gold Futures Options
The terms “gold futures contracts” and “gold futures options” can be confusing. Options always have a contract underlying them. In a gold futures contract, each holder must fulfill the contract to buy or sell gold by the delivery date, unless the contract is offset. In the trading of a gold futures option, it’s at the buyer’s discretion to inherit the contract commitment, called the position, attached to the option up to the expiration date of the option.
Cost of Trading a Gold Futures Option
Gold futures options lose value over time as the expiration date approaches. The price depends on:
how much time remains for the buyer to take the option
the difference between the strike price and the price of the current gold futures market
For Investors Looking to Buy Gold Futures Options
A gold futures option involves a put option or call option, each traded separately, on an underlying gold futures contract and expires at a set date. Gold futures options are traded on a commodity exchange. Purchase them through a brokerage account, and possibly from a futures options broker.
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