Posted on 08 November 2011.
Gold options are like other options contracts but their underlying assets are gold futures rather than some other stock or commodity. Like all options, gold options entail the right to buy or sell gold futures at set prices before an expiration date. However, holders of options are not obligated to carry through with this purchase. The standard quantity for these futures is 1,000 grams. The prices for these quantities are quoted in terms of yen per gram.
Just like other options, gold options come in two forms. These are the call and put options. Traders who expect the price of gold to rise buy gold call options, intending to sell them after the price of gold surpasses the price stipulated in the contract. Traders who expect the price of gold to fall buy put options and sell them for a profit when the market value of gold descends below the contract price. Unlike futures, however, options do not require investors to do anything with their contracts and traders may let them expire without suffering any loss besides that of the premium they paid for the option.
Gold options possess certain advantages over gold futures. These advantages lie in the increased amount of flexibility and leverage that options provide in addition to the limits that they place on losses if a trader misjudges the market. They are not superior in every respect, however, and regular gold futures continue to experience lively trading.
It is the limitation of losses that generates the most interest in these financial instruments. When a trader purchases a gold option, whether it is a call or a put, he or she retains the right to abandon the contract at any point. The only loss that occurs is the fees paid to acquire the gold options.
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