How to Buy Gold Options
You may buy gold options to trade an expectation on the direction and/or volatility of the price of gold (XAU/USD). Gold options are available on web-trading platforms, such as optionsReasy, and MetaTrader4. If you want to know how to invest in the gold market using options here's a short guide.
Why Buy Gold Options?
• Risk is limited to the price paid for the option
• You do not have to utilise a stop-loss order to limit risk, i.e. you can avoid stop-outs
• Your profit is unlimited
Trading Gold: Call and Put Options
Through buyig options, you can trade a rising or falling price. If you expect the price of gold to go UP you may buy a gold Call option. A Call gives the right, but not the obligation, to buy gold at a certain price over a certain period of time. The price you can buy at is called the 'strike price'. As the price of gold rises above the strike your option becomes more valuable. Why? Because using your option you can buy gold at a cheaper price than market price. The more your option's strike can 'beat' the market, the more valuable the option.
For example, the below image is a gold (XAU/USD) Call option trade set-up on the optionsReasy web-platform.
5 steps to setting-up an option:
1. Select the pair you want to trade, for this example we have chosen 'XAU/USD'
2. Select the option type, we have chosen 'Call'
3. Enter the strike rate. We have entered $1160 since we expect the price of gold to rise above this level
4. Select an expiry date depending on the duration you expect the move to happen - we have chosen '2 days'
5. Enter an amount, we have reserved to buy '10 ounces' of gold.
This option costs 34.84 USD (as highlighted on teh image at point 6.). If you buy the option and the price of gold rises above the strike, the value of the option will rise. On the other-hand, if the price of gold does not rise, by expiry, you will incur a loss which is limited to the amount you paid for the option. Even if the price of gold falls to $0, your risk is never greater than 34.84 USD and you will never get stopped-out!
Note that, you do not have to hold your option until expiry. You can sell it anytime to lock in a profit or minimise a loss.
If you expect the price of gold to move DOWN you may buy a Put option. A Put gives you the right, but not the obligation, to sell gold at a certain price (the strike) over a certain period of time. As the price of gold falls below the strike your option becomes more valuable. Why? Because using your option you can sell gold at a higher price than market price. The more your option's strike can 'beat' the market, the more valuable the option.
For example, the below image is a gold Put option trade set-up on the optionsReasy web-platform. It is an option to sell 10 ounces of gold at a price of $1150 over the next 2-days. It costs 36.90 USD to buy the option.
If the price of gold falls below the strike of $1150 over the next 2-days, the option's value will increase and you may close at a profit. If the price of gold does not fall, by expiry, you will make a loss. You maximum loss is the premium you paid to buy the option, that is 36.90 USD.
When to Buy Options?
The value of the option is tied to the underlying price of gold (XAU/USD). Investors often buy options when they are expecting a large move in the underlying market, i.e. when XAU/USD is expected to become more volatile.
Cost of an Option
The further the strike is away from the market price (for a Call this is above the market and for a Put this is below the market), the cheaper the price paid for the option, however there is the less chance the option will be profitable by expiry (because market price will need to move further in your direction before the option is profitable).
An option is also cheaper to buy when the expiry date is closer and longer term options are more expensive. This makes sense since if there is more time until expiry, there is a higher chance of the market moving in your favour. This may be described as 'buying more time'.
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