Know The Difference Between Gold Futures And Gold Options
If you plan to invest in gold, you may wonder if gold options or futures are a good way to do that? It is a good idea to define each concept first. What exactly are gold options? Gold options are contracts based on the asset of gold futures. Those who own gold options are allowed (but not required) to take a short or long investment position at the strike price and in the respective gold futures. When the option expires, you no longer have this right. Gold options can be traded at the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM). On NYMEX, option prices are quoted in cents and dollars and per ounce, and the futures are traded in series of 100 gold ounces. On the Tokyo Commodity Exchange, options are quoted in yens and traded in 1000 grams.
There are two types of options – call and put. Call options are favored by investors who think the price of gold will rise. It is just the opposite with put options, and investors favor them when they think gold prices will go down.
Options exchange trade is not limited to call and put buying. Another popular trade strategy is selling and spreads. The latter is carried out by buying and selling options at the same time.
Seemingly, there is not much of a difference between gold futures and options. Are they different and how? Trading gold futures serves to reduce the risk of trading gold that gold owners and producers face given the unstable prices. Gold producers use a short hedge to make sure their gold with be traded at a specified price. A short hedge is, for example, when a mining company signs an agreement to sell a certain amount of gold that will be delivered at a certain time. The price will match the price of gold on the date of delivery, which is in 4 months’ time. The company locks in the price by selling short a specific number of futures contracts on the respective exchange. If each contract covers 50 oz of gold, the company will have to short 50 futures contracts.
This method is referred to as placing a hedge around the gold, making sure that the gold will be sold as agreed. There are advantages to gold options, including the opportunity to limit losses, along with extra leverage.
With gold futures, there are some factors determining their price when trading. These include changes in supply, including whether production quantities have been met or exceeded. The technology used to extract material is also important as it determines whether the mining company will have access to and extract metal. Another factor is changes in demand and whether some states are planning to increase their gold stock reserves. Recently, China and Russia have done so. Given that a number of factors influence the price of gold futures, the advice of an investment advisor may be of help. While profits can be high, investing in gold futures is not for risk-averse investors. Here you will find a lot of information about investment in gold and what are gold certificates investment.
