Three Ways To Do Gold Options Trading – and a Fourth Way if that Doesn’t Work for You
1. Options on Futures
Gold options trading is designed to take advantage of price movements in the global price of gold in such a way that limits risk and magnifies profits in proportion to the amount invested. Gold is a commodity and as such, attracts futures contracts that are often used by large corporations as a means of hedging against price fluctuations. These futures contracts are called “Gold Futures” and are traded on the major commodities exchanges around the world such as the Chicago Mercantile Exchange (CME) and New York Mercantile Exchange (NYMEX) in the US, with symbol GC (plus appropriate extension for each future).
Gold futures can be a great alternative to investing in gold bullion itself, or gold coins or company stocks involved in gold mining.
For traders however, futures contracts carry unlimited risk, meaning that if the price action goes against you, you can lose more than you risked for the trade – and since futures are leveraged financial instruments – a lot more!
This is where options come in.
Gold options trading involves taking out options contracts (symbol OG) on gold futures (GC) as the underlying financial instrument. Gold options are traded through a division of the NYMEX called COMEX whose main focus is options on precious metals. Each gold option contract covers one COMEX Gold futures contract and the strike prices are quoted in US Dollars and increments of ten cents per troy ounce of gold. If you are still holding the options at expiration date and they are in-the-money, the options will be exercised and the gold futures, each contracts covering 100 troy ounces of gold, will be delivered to you. These in turn will be subject to the normal risk vs reward associated with commodity futures.
Most of the more popular brokers, allow you to trade options on gold futures.
2. Gold Options Trading Using ETFs
If using options on futures seems too complicated for you, another way of trading on the price of gold is to use an Exchange Traded Fund (ETF) whose stock price is designed to reflect the performance of the price of gold bullion. The most popular one in the USA is the streetTRACKS Gold Shares ETF whose symbol is GLD. It ranks number 5 among the top 100 ETFs and open interest on its options are in the thousands, particularly for near month options.
Since this ETF trades at one-tenth of the price of gold, it means that if the current gold price is say, $1,550 per ounce, then the stock price will be $155 per share. Since the options are highly liquid and easily traded, you can either trade simple directional plays, or construct more advanced options positions. Gold price action can be quite volatile and breakouts from consolidation are common particular during economic uncertainty and therefore, ripe for option straddle plays.
3. Gold Option Trading With Binary Options
If you’re more inclined towards short term trading, or even day trading, you may wish to consider using binary options. These are a different style of option contract where you either receive a profit of about 70 percent if you’re right, or only 85 percent loss on your invested amount if you’re wrong. You name a strike price and expiration period and if the price of gold bullion is above or below that price (depending on whether you chose calls or puts) you either get paid a fixed amount or you don’t. In some cases, the expiration can be only hours away.
You can trade binary options on gold, along with a number of other instruments such as forex pairs, indices and other commodities with Anyoption binary options brokers.
4. Trading the Spot Gold Price Using a Forex Broker
Whilst trading the spot price of gold isn’t gold options trading, it is another way of doing it. You will find that most reputable forex brokers will also include the price of gold among their list of tradable securities. Although primarily focused on currency pairs (forex), gold in it’s relationship to the value of the US Dollar (XAU/USD) will also be included. If you’re residing in the United States this will be perfect for you, as there will be no other currency issues. Nevertheless, traders from all over the world can follow and profit from movements in the gold price by using a forex broker.
The great thing about forex is, that you experience the power of leverage. Your small investment (risk) will allow you to experience the effect of price movements of a much larger actual currency, or in this case, precious metal. But it works both ways – you can also lose just as much if the price action goes against you. If you want to trade gold this way, you need a good trading strategy which includes effective money management using appropriate position sizing and stops.