Charles Davenport of Whitley Trading Explains How to Invest in Gold
Buy gold options to attain a position in gold for less capital than buying physical gold or gold futures.
By: Whitley Trading
Investors can also invest through the use of futures contracts or exchange-traded products (ETPs) that directly track a specific commodity index. These are highly volatile and complex investments that are generally recommended for sophisticated investors only.
Use options to profit whether gold prices rise or fall. 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.
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.
To buy gold options traders need a margin brokerage account which allows trading in futures and options, provided by Whitley Trading, TD Ameritrade and others.
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.