Options on Gold
The United States economy is in recovery and the price of gold is sinking. The US Federal Reserve plans to cut back on stimulus spending which is driving up interest rates and driving down the price of gold. In this climate options on gold are probably a better choice than directly buying or selling gold or equities based on the precious metal. If you want to trade options on gold you can trade options on gold bullion, gold mining stocks, or gold ETFs. Gold bullion is traded as a commodity so if you trade options on gold you are engaged in commodity options trading. You will trade futures on gold bullion.
Trading Options on Gold Bullion
Commodity futures options trading allows a trader to buy or sell puts or calls on gold bullion futures contracts. The buyer of a call contract pays for the right to purchase a contract but incurs no obligation to do so. He simply pays a fee to reserve the right to buy if the price is right any time before contract expiration. The buyer of a put contract pays for the right to sell a futures contract at any point before expiration. He is under no obligation to do so and will only exercise the contract if it is profitable. On the other hand sellers of puts and calls are paid to accept risk. They are obligated to sell or buy contracts if the buyer so chooses which is only when the buyer makes money and the seller loses. Trading gold options can be very profitable in a volatile market if the trader limits himself to purchasing calls or puts. It can also be profitable for sellers in a quiet market. In fact, over time, sellers tend to make more money than buyers of options contracts. The problem for sellers is that an occasional large loss can be catastrophic. As such selling options on gold is often the province or large investment houses or traders with deep pockets.
Variations on Trading Options on Gold
To alternatives to trading gold bullion are Gold based exchange traded funds and mining stocks. Traders can track the price of gold on exchange traded funds. These funds are traded like stocks and are constantly adjusted to match the price of gold bullion. Mining stocks prosper when gold goes up and suffer when the price of gold goes down. In both cases traders can trade options on gold via an alternative route.