Trade Options

Gold options are defined as commodity options contracts under which the buyer has the right, but not any obligation to purchase at a specific price a predetermined quantity of gold, on the settlement date in the future. The introduction of options to the gold trading has become a popular trading tool in the hands of the traders for the simple reason that even small traders can enter the gold trading arena. Moreover, even the seasoned traders require a fraction of the amount to enter trading of gold when compared with the underlying price of gold. Thus, the risk of potential loss is limited to the amount spent on the acquiring of the option.

In the gold options trading, the traders make profit by speculating on the price of the underlying security, in this case, gold. Since the loss is limited to the amount of premium spent on purchase of the option, traders find gold option trading a beneficial trade to indulge. Moreover, at a fraction of the cost for the entry to the gold trading, they benefit from the additional advantage provided. To trade gold options, the traders can trade on any of the exchanges like the Commodity Exchange Inc. New York, the Chicago Board Options Exchange, the Philadelphia Stock Exchange and the Mid-America Commodity Exchange.

Here are the steps on how to trade gold options:

1. To start trading, a trader must first open an options trading account by making an initial deposit. As mentioned, gold options are traded on the various exchanges and even through online sites and trading platforms. Market volatility decides the amount that is payable as the initial margin deposit required to open an account. To avoid a margin call, which is the broker’s demand to deposit additional money, a trader must always maintain a balance, which is above the initial deposit money in the account. Traders must ensure that they open accounts with known and reputable exchanges and online sites to minimize the risk.

2. Once the account is open, the trader can purchase a put or a call option. When a trader secures an option, he purchases the right to buy or sell gold at a certain price, known as the strike price. The call options are purchased if the trader speculates that the price of gold would rise in the future. The put option is bought, when the price of gold, is speculated to fall.

3. To avoid delivery, you must liquidate the contract before the date of settlement of the gold option. The gold traders generally follow the practice of selling the gold before the settlement date in a bid to make profits. The gold contracts are based on time value and intrinsic value. When the strike price of the gold option is close to the current prevailing price in the market, the option is considered valuable and this is the intrinsic value. The proximity of the options contract to the settlement date is the basis of the calculation of time value. A distant settlement date implies a more valuable option. The time and the intrinsic values are calculated by algorithms and this is how the options premium price is generated.