You want to make a gold investment, either in gold futures or options, but you can't decide? Let's start by defining each concept. What exactly are gold options? Gold options are contracts based on the asset of gold futures. If you own a gold option, you have the right (but will not be forced to) to take a long or short investment position in the respective gold futures at the relevant strike price. You cannot do this when the option expires. Options are traded on exchanges such as the Tokyo Commodity Exchange (TOCOM) and the New York Mercantile Exchange (NYMEX). 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 TOCOM, options are traded in 1000 grams and quoted in yens. The two kinds of options are put and call. Call options are favored by investors who think the price of gold will rise. With put options, it is the opposite - they are usually bought by investors who believe gold prices will fall.
Trade on options exchanges is not just about put and call buying. Selling and spreads is another commonly used strategy. Investors who use this strategy buy and sell options simultaneously.
It seems like options are quite similar to gold futures. What is the difference, if any? Buying and selling gold futures is a way to manage the risk of trade with gold that gold producers and owners face, with view to 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. For example, the company shorts fifty futures contracts if each contract has fifty ounces of gold.
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. Changes in demand are another key factor, with some states already increasing their gold 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. Gold futures are a risky investment instrument although profits may be high.
Trade on options exchanges is not just about put and call buying. Selling and spreads is another commonly used strategy. Investors who use this strategy buy and sell options simultaneously.
It seems like options are quite similar to gold futures. What is the difference, if any? Buying and selling gold futures is a way to manage the risk of trade with gold that gold producers and owners face, with view to 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. For example, the company shorts fifty futures contracts if each contract has fifty ounces of gold.
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. Changes in demand are another key factor, with some states already increasing their gold 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. Gold futures are a risky investment instrument although profits may be high.
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