For additional, free educational resources on trading gold future, visit: The Future Options Trading
When people invest in a precious medal, such as a gold future or silver future, they look to invest in something that has long held historical monetary significance. Gold is most known for being used as a currency throughout history, and through modern times it is seen as a symbol of social status – through both jewelry and novelty items.
Ok, so you are someone that has always wanted to be involved in trading or investing a gold future contract. How do you go about doing so, especially since you may not have experience in investing in gold?
A popular belief would be to begin day-trading a gold future contract, which would essentially be gambling on short-term volatility moves. But, one thing that many people fail to realize is that 9 OUT OF 10 DAY-TRADERS LOSE. I apologize for the boldness of the previous statement, but it is a point I make sure to get across to those who want to become the next Gordon Gecko. These people with dreams of making millions on a $5,000.00 account have to realize that, while it may be possible, it is HIGHLY unlikely. In the commodities markets, volatility is HIGHEST in the short-term. Meaning that while you can hit a big profit in one market move, you can also wipe out your account (and then some) in one big market move.
Considering you have gotten the point that day-trading is not something an inexperienced trader/investor (and even most experienced but unsuccessful traders) should attempt, what is a “safer” way to approach trading a gold future contract?
Well, many people who like to operate with a fixed risk when trading a gold future contract prefer to buy options. When you buy an option, you pick a price where you think the market will go in the future (your strike price), pay a set price for that option (also known as the premium), and then you see if the underlying futures contract hits your chosen strike price.
Sounds easy enough, right? Well, although you only risk what you pay for a premium when purchasing an option on an underlying gold future contract, there is one key statistic that is of the utmost importance when trading options: The Chicago Mercantile Exchange Estimates Roughly 80% of options expire worthless. Buying options, although they have fixed risk benefits, has a low probability of success.
So, we see this good percentage presented in the commodities markets. How can we use probability to our advantage when trading a gold future contract?
The answer is the reverse of buying options: selling options. When you sell an option (also known as writing an option), the buyer of that option pays you a premium for that option. When that option expires worthless (remember that roughly 80% do expire worthless), the option seller collects the premium.
Remember earlier when it was mentioned that one of the primary reasons that gold future day-traders lose is because of short-term volatility in the market?
Well, when you sell an option, you pick a point in the market where you DO NOT think the market will go. The price of the underlying futures contract can:
1. Move away from that strike price.
2. Move sideways.
3. Even move against that strike price, so long as the underlying price doesn’t touch the strike price upon expiration.
Now, of course, when it comes to selling a gold future option there is risk. When you sell an option, it carries the same risk as if you bought or sold a naked future contract with one major exception: It will generally move slower than a futures position. This gives a gold future trader more time and latitude to exit should the market move sharply against his/her option.
Now, you still MUST remember that while selling options can potentially put the odds of success in your favor, it still requires good, solid market analysis. The difference is, selling options gives you a large margin of error. You don’t have to be as exact as in the futures market, only close.
There is a great website I always recommend new and seasoned traders to take a look at when looking for some additional education on trading the markets. Not only does this site go into depth with real-life examples of option selling, but it also gives you a trading eBook, demo trading platform, information on managed futures investing, and an overview of all strategies used in commodities trading.
You can take a look at it here: Future Options Trading
