In this post, I’ll be explaining some of the advantages of trading Gold futures & options.
Whether you’re a seasoned investor or just starting out, understanding the benefits of these financial instruments can be a game-changer. Let’s get started…
Gold futures & options allow investors to take advantage of the ever-changing price of Gold. These contracts can offer several benefits to investors, including…
Portfolio Diversification: Gold is considered a hedge against inflation and economic uncertainty. Adding Gold futures & options to an investment portfolio can help diversify risk and potentially reduce overall portfolio volatility.
Leverage: Gold futures & options allow investors to control a large amount of Gold with a relatively small amount of capital. Investors can now take advantage of price movements in the Gold market without having to physically purchase and store actual Gold.
Flexibility: Gold futures & options can be traded in various time frames, from short-term positions to longer-term investments. This can give investors the flexibility to choose a contract and time period that aligns with their investment goals and risk tolerance.
Transparency: The most popular Gold futures & options contracts are traded on the CME’s COMEX U.S. regulated futures exchange, which provides a transparent and liquid market for trading. This transparency can make it easier for investors to buy and sell gold futures & options and helps to ensure that prices are fair and reflective of market conditions.
The mechanics of trading Gold Futures & Options
Gold Futures Contract Specifications
– Futures Exchange: CME COMEX
– Futures Contract Symbol: GC
– Futures Contract Size: 100 troy ounces of Gold
– Minimum Price Movement (Tick): 10¢ (equivalent to $10)
Let’s take a look at a few trade examples. I’ll start with a Gold futures trade setup first.
As you can see in this daily gold chart (fig. 1), prices have been trending upward for the past several months. However, we’ve seen some price pullback over the last few days, which could present a buying opportunity to those investors who feel the upward trend will continue.
Figure 1 – Daily Gold Chart
With this in mind, a Gold futures contract can be purchased at the current market price of 1865 per ounce. Once the position is established, the trader will begin to see a profit if prices rise from their entry point. Of course, if prices drop from the entry price, a loss will be incurred.
Gold futures trade in 10¢ price increments, which equates to $10. This minimum price movement is known as a ‘tick.’ For example, if Gold prices increased 50¢ an ounce to 1865.50, then that would be an increase in value of $50. Conversely, if Gold prices dropped to 1864.20, a loss of $80 would be incurred.
One Gold futures contract equals 100 troy ounces of Gold. This means for every dollar Gold moves up or down, $100 is either gained or lost. When trading futures, each contract will have what’s known as a margin requirement* to trade one contract. Think of the margin requirement as a performance bond. It is the amount of funds a trader needs to have available in their trading account to trade a particular futures contract.
The margin requirement is typically 5% or less of the total value of the futures contract. Based upon a price of 1865 per ounce, one Gold futures contract is worth $186,500 – this is where the benefit of leverage comes into play. An investor can control $186,500 worth of Gold with only $9,325 or less! Current margin requirements are published on our website.
Looking at the daily Gold chart again (fig. 1), here are a few scenarios that could play out with this trade example…
Scenario #1: If Gold prices were to resume their uptrend and the trader could exit their position at a price of 1980 (fig.2), a gain of $115 per ounce would be realized, equating to a gross profit of $11,500.
Figure 2 – Daily Gold Chart
Scenario #2: If Gold prices dropped to 1780 (fig. 3) per ounce and the trader exited their position, they would have a loss of $85 per ounce or $8,500.
Figure 3 – Daily Gold Chart
Of course, the trade can be exited at any time prior to its expiration date. To calculate your profit or loss, simply subtract your entry price from your exit price and multiply the difference by $100. Remember to account for commissions and fees when calculating your profits and losses.
Now, let’s look at a Gold futures option trade.
Again, if an investor felt Gold prices would continue rising, they could purchase a Call option. A Call option gives the purchaser the right, but not the obligation, to purchase a futures contract at a specified price. This is known as the ‘Strike’ price. When trading options, there will be many strike prices to choose from.
Looking at our Gold daily chart (fig. 4), we’ll choose a strike price close to the price of the underlying Gold futures contract – in this case, a Call option with a strike price of 1875. This strike price is currently trading for 40 points – which equates to a cost of $4,000 (40 x $100).
Figure 4 – Daily Gold Chart
In this example, if the value of the 1875 Call rose to 60 points, the value of the Gold option would then be $6,000, $2,000 greater than the option’s purchase price. Conversely, if the value of the option dropped to 20 points, it would then have a value of $2,000, which would equate to a loss of $2,000 from the purchase price.
If the price of the underlying Gold futures contract were to be greater than the Call strike price when the option expires, then the futures exchange would automatically convert the option into a futures contract with an entry price equal to the option’s strike price. If this occurs, it typically is a good thing as the market moved in the trader’s favor.
You do not have to hold a futures option until it expires. It can be liquidated anytime up to its expiration date.
Trading options is a bit more complicated than trading futures. I would recommend anyone new to trading options to fully research the subject and have a complete understanding of the mechanics of options trading prior to investing any money. I’m available to assist any client interested in trading futures options as well.
Wrapping it all up.
Trading gold futures & options can be a valuable tool for investors looking to gain exposure to the gold market, diversify their portfolio, and potentially benefit from price movements in the precious metal. Always keep in mind, although there is potential for profit, there is also potential for loss. Proper money and risk management must be utilized whenever trading futures and futures options.
For those looking for additional information, we have partnered with the CME futures exchange and offer the Gold Futures & Options Information Guide…
Click Here for Access
Additionally, our YouTube channel has several training videos that offer more insight into trading futures & futures options. Click Here to check them out.
I hope you’ve found this information helpful & informative. If you have any questions, please leave them in the comments below or feel free to contact me directly – I’ll be happy to help.
Principal Futures Broker
Series 3 / Series 30 Licensed
Phone: 1-847-379-5000 – ext. 101
*margins are subject to change without notice
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