Buying Gold Put Options to Profit from a Fall in Gold Prices

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Contents

Buying Gold Put Options to Profit from a Fall in Gold Prices

If you are bearish on gold, you can profit from a fall in gold price by buying (going long) gold put options.

Example: Long Gold Put Option

You observed that the near-month TOCOM Gold futures contract is trading at the price of JPY 2,518 per gram. A TOCOM Gold put option with the same expiration month and a nearby strike price of JPY 2,500 is being priced at JPY 168.00/gm. Since each underlying TOCOM Gold futures contract represents 1,000 grams of gold, the premium you need to pay to own the put option is JPY 168,000.

Assuming that by option expiration day, the price of the underlying gold futures has fallen by 15% and is now trading at JPY 2,140 per gram. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying gold futures at the strike price of JPY 2,500. In other words, it also means that you get to sell 1,000 grams of gold at JPY 2,500/gm on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying gold futures at the market price of JPY 2,140 per gram, resulting in a gain of JPY 360.00/gm. Since each TOCOM Gold put option covers 1,000 grams of gold, gain from the long put position is JPY 360,000. Deducting the initial premium of JPY 168,000 you paid to purchase the put option, your net profit from the long put strategy will come to JPY 192,000.

Long Gold Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (JPY 2,500/gm – JPY 2,140/gm) x 1000 gm
= JPY 360,000
Investment = Initial Premium Paid
= JPY 168,000
Net Profit = Gain from Option Exercise – Investment
= JPY 360,000 – JPY 168,000
= JPY 192,000
Return on Investment = 114%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the gold option sale will be equal to it’s intrinsic value.

Learn More About Gold Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

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  • Binomo
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Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Gold Call Options to Profit from a Rise in Gold Prices

If you are bullish on gold, you can profit from a rise in gold price by buying (going long) gold call options.

Example: Long Gold Call Option

You observed that the near-month TOCOM Gold futures contract is trading at the price of JPY 2,518 per gram. A TOCOM Gold call option with the same expiration month and a nearby strike price of JPY 2,500 is being priced at JPY 168.00/gm. Since each underlying TOCOM Gold futures contract represents 1000 grams of gold, the premium you need to pay to own the call option is JPY 168,000.

Assuming that by option expiration day, the price of the underlying gold futures has risen by 15% and is now trading at JPY 2,896 per gram. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying gold futures at the strike price of JPY 2,500. This means that you get to buy the underlying gold at only JPY 2,500/gm on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying gold futures at the market price of JPY 2,896 per gram, resulting in a gain of JPY 396.00/gm. Since each TOCOM Gold call option covers 1000 grams of gold, gain from the long call position is JPY 396,000. Deducting the initial premium of JPY 168,000 you paid to buy the call option, your net profit from the long call strategy will come to JPY 228,000.

Long Gold Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (JPY 2,896/gm – JPY 2,500/gm) x 1000 gm
= JPY 396,000
Investment = Initial Premium Paid
= JPY 168,000
Net Profit = Gain from Option Exercise – Investment
= JPY 396,000 – JPY 168,000
= JPY 228,000
Return on Investment = 136%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the gold option sale will be equal to it’s intrinsic value.

Learn More About Gold Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How To Buy Gold Options

An advantage of options is that you can use gold options to attain a position in gold for less up-front capital than buying physical gold or gold futures. Gold options are available in the U.S. through the Chicago Mercantile Exchange (CME), so if you’ve wondered how to invest in gold, here’s a shorter-term and less capital intensive way to do it.

Key Takeaways

  • Gold options are options contracts that utilize either physical gold or gold futures as their underlying instrument.
  • Call options on gold give the contract holder the right to buy the metal at a pre-set price before it expires, and put options the right to sell.
  • Gold options trading in the U.S. are listed on the CME COMEX and use gold futures (which in turn represent 100 troy oz. of gold) as its underlying asset.
  • Check with your broker to see if you have access to these markets through their platform.

Gold Calls and Puts

You can use options to profit whether gold prices rise or fall – or even stays the same. Believe the price of gold will rise? Buy a gold call option. A call option gives the right, but not the obligation, to buy gold at a specific price for a certain amount of time (expiry). The price you can buy gold at is called the strike price. If the price of gold rises above your strike price before the option expires, you make a profit. If the price of gold is below your strike price at expiry, you lose what you paid for the option, called the premium.

Put options give the right, but not the obligation, to sell gold at a specific price (strike price) for a certain amount of time. If the price of gold falls below the strike price, you reap a profit of the difference between the strike price and current gold price (approximately). If the price of gold is above your strike price at expiry, your option is worthless and you lose the premium you paid for the option.

If you think the price of gold will not move very much for an extended period? You can write a covered call or sell a straddle to profit off of a sideways market.

It is not necessary to hold your option till expiry. Sell it at any time to lock in a profit or minimize a loss.

How to Trade Gold Options

To buy gold options traders need a margin brokerage account which allows trading in futures and options, provided by services such as Interactive Brokers, TD Ameritrade and others. Not all brokers will allow direct access to gold options markets, even with options trading you may be limited to options on stocks and ETFs (although you can use that ability to trade options on gold ETFs or mining stocks).

Check with your broker to see if they offer trading on gold options and futures, and if so what is required to get access to those markets.

Gold Options Specifications

Gold options are cleared through the Chicago Mercantile Exchange (CME) and its COMEX unit, trading under the symbol heading “OG”. The value of the options is tied to the price of gold futures, which also trade on the CME. 40 individual strike prices are offered, in $5 increments above the below the the current gold price. The further the strike price from the current gold price, the cheaper the premium paid for the option, but the less chance there is that the option will be profitable before expiry. There are more than 20 expiry times to choose from, ranging from short-term to long-term.

Each option contract controls 100 ounces of gold. If the cost of an option is $12, then the amount paid for the option is $12 x 100 = $1200. Buying a gold futures contract which controls 100 ounces requires $7,150 in initial margin. Buying physical gold requires the full cash outlay for each ounce purchased.

Gold options prices and volume data are found in the Quotes section of the CME website, or through the trading platform provided by an options broker.

The Bottom Line

Calls and puts allow traders a less capital intensive way to profit from gold uptrends or downtrends respectively. If the option expires worthless, the amount paid (premium) for the option is lost; risk is limited to this cost. Trading gold options requires a margin brokerage account with access to options.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect Choice For Beginners and Middle-Level Traders!
    Free Demo Account! Free Education!

  • Binomo
    Binomo

    Honest broker!

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