Thursday, January 20, 2011

Gold futures options are distinct from gold futures contracts. Gold options trading in futures is the buying and selling of gold options through a commodity exchange.

Gold futures options are a form of investing in gold. With gold futures trading, an investor trades gold futures contracts or gold futures options as commodities. Ever since the first gold futures contract was offered by the Winnipeg Commodity Exchange in 1972, futures trading has played a role in the gold market. The very first exchange-mediated gold futures options, which are options to buy or sell futures contracts, were offered in 1982 by COMEX. Gold futures are traded at two primary global exchanges: Commodity Exchange, Inc (COMEX) in New York, and the Tokyo Commodity Exchange (TOCOM) in Tokyo.

How Gold Futures Options Work

With gold futures contracts, investors contract to buy or sell gold at a certain quantity for a specific, pre-set price at a planned future date. Gold futures are relatively liquid because they are standardized this way.

The "option" part of gold futures options means that the buyer of the option may buy or sell the underlying futures contract within a specified time period (up to the expiration date) for a specified price, called the "strike price." If bought at an at-the-money strike price, the option is purchased with a strike price equivalent to the current market price of the gold futures contract.

Put Options and Call Options Explained

With the trading of gold futures options, an investor is essentially betting on the future price of gold. If the investor expects the price to go up, he or she can buy a "call" option. Call options offer the buyer the chance to buy the futures contract later at a set price, ideally below that of the current futures market.

If the investor expects the price of gold futures to fall, he or she can buy a "put" option. Put options give investors the optional right to sell the futures contract to the buyers, ideally at a premium price.

Is There Any Physical "Gold" in Gold Futures?

Trading gold futures securities happens primarily on paper: most of the gold bought or sold in the futures market never moves. Gold futures are typically traded by "speculators," investors who buy or sell gold futures but aren't interested in the physical gold, versus "hedgers," who do value the gold itself as an investment. Additionally, those wanting primarily to invest in physical gold might opt to invest in gold bullion.

What Does it Mean to Offset a Futures Contract?

The futures contract transaction will not be completed - that is, nobody will actually buy the gold - if the contract is "offset" by the involved parties. Offsetting is the effective voiding of the contract by changing the terms of the commitment in a trading transaction. For example, if the investor does buy a put option to sell, the contract can be offset if the buyer then buys a gold futures option below the strike price.

For Investors Looking to Buy Gold Futures Options

A gold futures option involves a put option or call option, each traded separately, on an underlying gold futures contract and expires at a set date. Gold futures options are traded on a commodity exchange. Purchase them through a brokerage account, and possibly from a futures options broker. For a basic introduction to the different types of investing in gold, see Gold Investing 101.

How to Trade Gold?

Of course to trade gold you don't need to carry any gold bullion around. We have been able to incorporate online gold trading into our software seamlessly because online gold trading is done in the same manner as currency trading. Due to our traders' experience with currency futures trading, they should have an automatic familiarity with gold futures trading even if they have never traded gold before, unlike trading stocks or stock options for example, which would take additional training. All you have to do is predict whether the price of gold will be going up or down against the USD, set your leverage, choose the amount of gold you want to buy or sell, and open the trade. To determine these parameters you can view live charts of gold prices and then perform technical analysis the same way you do for currencies. To monitor gold prices you can set alarm signals to go off when the price of gold hits a certain value. The gold market also operates 24 hours a day, except on weekends, so you can easily fit it into your trading schedule.

Gold Trading Strategy and Tips

There are several ways in which gold trading differs from foreign exchange trading. The gold market is a lot less volatile, and therefore scalping while trading gold is nearly impossible. Because gold is much more expensive in value, you will need to make larger investments with lower leverages (the range for gold trading is 1:5 – 1:25). However, this kind of large investment can make a huge difference to your portfolio since it will stabilize and hedge other, more volatile trades. Once you get the basics of gold trading, which shouldn’t take long, you can incorporate gold trading into your trading system, or even develop a new system specifically for trading gold. The best way to learn more even more gold trading tips and tricks is to go to our forums and the eToro blog, to see what the experts have to say about it.

Gold trading at eToro is commission free. To start trading gold with eToro simply log into your account, go to eToro's expert mode and click on the commodities tab in the live rates box.

References Used in This Article:

U.S. Department of Agriculture Risk Management Agency

U.S. Commodity Futures Trading Commission