Gold Futures and Options

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Gold Options

Because of the global nature of the metals market, their prices can be volatile. The industry and other market participants cope with this price uncertainty by actively hedging against adverse price movements. While futures are among the primary risk management tools available, options open a host of versatile, economical trading strategies.

Options on futures provide:

• A limit on potential loss to the buyer.
• The ability to hedge without foregoing the benefits of favorable price movements.
• The availability of hedging insurance at many different levels of cost and degrees of protection.
• A way for businesses and investors to act aggressively or conservatively on views about the direction and volatility of gold prices.

By using options alone, or in combination with futures contracts, strategies can be found to cover virtually any risk profile, time horizon, or cost consideration.

Regular COMEX Division gold options are offered for trading during the nearest six contract months of February, April, June, August, October, and December. Additional contract months - January, March, May, July, September, and November - will be listed for trading for a period of two months. A 24-month option is added on a June - December cycle. These options are American-style and can be exercised at any time up to expiration.

There are two types of options, calls and puts. A call gives the holder of the option the right, but not the obligation, to buy the underlying futures contract. Conversely, the put gives the holder the right to sell the futures contract. Puts are usually bought when the expectation is for neutral or falling prices, a call is usually purchased when the expectation is for rising prices. The price at which the option is bought or sold is the premium.

Clearing Futures Trades

At the end of each business day, every futures trade that has been executed is recorded on the books of the Exchange clearinghouse. The clearinghouse performs several important functions, including assuring that all accounts of clearing members are balanced at the end of each trading day, settling all gains and losses resulting from trading, and acting as the opposite party to every completed transaction.

The clearinghouse functions as the guarantor to every trade, eliminating counterparty credit risk. Each clearing member is required to deposit funds on a daily basis in proportion to the number of contracts cleared. These deposits, along with the guarantee fund, are available against default by any clearing member.

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See also the Gold Futures Options Trading Special Report

New York Merchantile Exchange Gold Futures Trading Specifications and Gold Options Trading Specifications