What is 'Gold Option'

A gold option is an option to buy or sell gold bullion at a future date at a set price. In this option, a gold futures contract would be the underlying asset securing the investment. The option agreement terms list details such as the delivery date, quantity and strike price, which are all predetermined. The option is just that, an option, and is therefore not an obligation on the part of the investor to either buy or sell the gold.

Gold options trade on the Tokyo Commodity Exchange and the New York Mercantile Exchange.

BREAKING DOWN 'Gold Option'

A gold option, like any other type of option, is a voluntary transaction. The buyer can activate the option and complete the transaction if they decide to do so. The option would disappear if the investor fails to exercise their right before the expiration date specified in the option terms.

An option is similar to a futures contract in that the price, date and amount are preset for both. The main difference between the two is that a futures contract is an obligation, or promise, made by the investor to uphold the contract. The futures contract represents a commitment made by the investor. By contrast, an option is not an obligation that would force the investor to take an action or abide by specific terms.

An investor who holds a gold option has the right to claim the relevant position, which will depend on the scenario. If the situation involves a call option, the investor is entitled to take the long position if they decide to exercise the option. In the case of a put option, the investor would assume the long position. In either case, the agreement would proceed at the strike price.

Condition for exercising gold options

As with other types of options, an investor would obviously only want to exercise his gold option rights if the market conditions make it beneficial to the investor to complete the purchase. If at the time the buyer can exercise their option, gold is trading at a price significantly higher than the set price, the investor would benefit by exercising their option. The investor could then turn around and quickly sell that gold on the open market for a quick profit. If gold is selling at or near the set price, the investor may break even or perhaps even take a loss, once their initial cost to purchase the option is factored in.

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