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What is a Gold Option?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 10 September 2016
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A gold option is a contract giving a person the right to sell or buy gold at a set price on a given date. It is not an obligation like a futures contract, where people are agreeing ahead of time on an amount, date, and price, but an opportunity; the person holding the option can choose to exercise it on a given date if the price agreed upon in the option is favorable. Gold options are traded in a large number of markets around the world in varying sizes.

Options contracts are contracts based on the opportunity to take advantage of the price of an underlying commodity, in this case in the form of a gold futures contract written for a particular date and price. They are used by investors to expand their investment possibilities and to be able to ride the prices of commodities both up and down. In the case of a put option, the holder can sell the gold. If gold prices are low when the option matures, the holder of the put option may have been able to secure an option at a higher price than the market rate, making it advantageous to sell. Call options give people the option to buy, allowing people to lock in a low price for gold to take advantage of in the event that prices are high when the gold option matures.

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If the person chooses not to exercise the gold option, it expires and the opportunity is lost. The losses from not exercising the option are usually much lower than the loss people would incur if they were obliged to buy or sell in poor market conditions. This makes options an appealing investment for some people operating on the gold market, leaving them with choices when it comes to investment strategy and how they want to spend their funds.

Each gold option is attached to a futures contract specifying a given amount of gold, a delivery date when the contract matures, and an agreed-upon price. The holder of a futures contract is obliged to make good on it when the contract matures and failure to buy or sell gold as dictated in the contract can be grounds for a suit for breach of contract. People holding options attached to those contracts have far more flexibility, as they can allow the gold option to expire and walk away from the deal.

Trading in gold options is done via open outcry in some financial markets, and people can also trade on electronic systems. People who are not interested in being involved directly can place orders with brokers, who will act as agents to fill the orders.

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