# Understanding Gold Options: Types, Mechanisms, and Trading Insights

## What Is a Gold Option?

A gold option is a financial contract that lets investors buy or sell gold at a set price by a certain date. Under the contract, the buyer has the right (but not the obligation) to purchase gold with a [call option](https://www.investopedia.com/terms/c/calloption.asp) and the right to sell it with a [put option](https://www.investopedia.com/terms/p/putoption.asp). Gold options are mainly traded on the CME COMEX and can involve physical gold or gold futures. Unlike futures contracts, which require buying or selling at expiration, options are more flexible. Trading gold options can offer benefits like hedging and profit opportunities, but they also carry risks that investors should understand.

### Key Takeaways

*   Gold options are derivatives that use physical gold or gold futures as the underlying asset.  
    
*   Call options grant the holder the right to buy gold at a preset price before expiration.  
    
*   Put options allow the holder to sell gold at a predetermined price before the contract expires.  
    
*   Trading gold options requires a margin brokerage account with options market access.  
    
*   Gold options can offer significant leverage but also carry the risk of significant losses.

## How Gold Options Function in Trading

A gold option is a [derivative](https://www.investopedia.com/terms/d/derivative.asp) that has physical gold, or [futures](https://www.investopedia.com/terms/f/futures.asp) on physical gold, as the underlying asset.

The gold options contract is an agreement between two parties to facilitate a potential transaction on a quantity of [gold](https://www.investopedia.com/articles/economics/09/why-gold-matters.asp). The contract lists a preset price, known as the [strike price](https://www.investopedia.com/terms/s/strikeprice.asp), and an expiration date.

There are two primary types of options contracts: put options and call options. However, there are four types of participants, as both the call and put can be either bought or sold.

## Exploring Different Types of Gold Options Calls and Puts

*   **Call gold options:** Give the holder the right, not the obligation, to buy a specific amount of gold at the strike price until the [expiration date](https://www.investopedia.com/terms/e/expirationdate.asp). A call option becomes more valuable as the price of gold increases because they locked in a buy at a lower price. When you buy a call, you may purchase gold, but when you sell a call, you are required to sell at the set price if the buyer demands delivery before expiration.
*   **Put gold options:** Give the owner the right, but not the obligation, to sell a specific amount of gold at the strike price until the expiration date. A put option becomes more valuable as the price of gold decreases because they locked in a sell at a higher price. If you buy the put, you have the right, but not the obligation, to sell the gold. Meanwhile, when you sell a put, you do not have a choice and must purchase the gold at the predetermined price from the person holding the opposite side of the contract.

If the holders of call or put options do not exercise their rights, the contract will expire as worthless.

## Comparing Gold Options and Gold Futures Contracts

A gold option is similar in some ways to a gold [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp) in that the price, the expiration date, and the dollar amount are preset for both. However, a futures contract obligates you to buy or sell the agreed amount of gold at the set price.

Conversely, an investor who holds a gold option has the right, but not the obligation, to claim the relevant position, which will depend on if they hold the call option or the put option.

## Key Specifications of Gold Options Contracts

Gold options contracts trade on various derivatives [exchanges](https://www.investopedia.com/terms/e/exchange.asp) around the world. In the U.S., investors can find gold options listed on the [COMEX](https://www.investopedia.com/terms/c/comex.asp) exchange.

COMEX is the primary futures and options market for trading metals such as gold, silver, copper, and aluminum. Formerly known as the Commodity Exchange Inc., COMEX merged with the [New York Mercantile Exchange (NYMEX)](https://www.investopedia.com/terms/n/nymex.asp) in 1994 and became the division responsible for metals trading. Today, COMEX—and the NYMEX more broadly—operates as a division of the [Chicago Mercantile Exchange (CME)](https://www.investopedia.com/terms/c/cme.asp).

COMEX gold options use gold futures, not physical gold, and are [cash-settled](https://www.investopedia.com/terms/c/cash-settled-options.asp). Each gold futures contract represents 100 [troy ounces](https://www.investopedia.com/terms/t/troyounce.asp) and requires [physical delivery](https://www.investopedia.com/terms/p/physicaldelivery.asp) if not closed out.

> **Warning**
>
> It is possible to experience significant losses with gold options.

## When to Exercise Gold Options for Maximum Benefit

As with other types of options, an investor would only want to exercise their gold option rights if the market conditions make it beneficial.

If at the time the buyer can use, or exercise, their call option, gold is trading at a price significantly higher than the strike price, the investor would benefit by exercising their option. The investor could then turn around and quickly sell that gold on the open [market](https://www.investopedia.com/terms/m/market.asp) for a quick profit.

Should, on the other hand, gold be trading at or near the strike price, the investor may [break even](https://www.investopedia.com/terms/b/breakeven-price.asp) or perhaps even take a loss once their initial cost to purchase the option is factored in.

## How Can I Buy Options on Gold?

Gold options are available the U.S. through the Chicago Mercantile Exchange (CME). These options contracts use gold futures as their underlying asset. To trade gold options, you will need a margin brokerage account with access to options markets. You could contact your current broker to see if they offer options trading or shop around for an [options trading account](https://www.investopedia.com/the-best-brokers-for-options-trading-8763492).

## What Are the Types of Gold Options?

Call options on gold give the contract holder the right, but not the obligation, to buy the metal at a preset price before the contract expires. A call option increases in value when the price of gold increases, as it locks in a lower buying price. Meanwhile, put options give the contract holder the right to sell gold at a predetermined level before the expiration date. As gold prices decline, a put option becomes more valuable, as it locks in a higher selling price.

## What Are the Pros and Cons of Gold Options?

Gold options allow traders to take out a position on gold using less up-front capital than they would by trading the physical metal or gold futures contracts. However, if gold prices move in an unfavorable direction, options can result in significant losses.  

## The Bottom Line

Gold options give investors the right, but not the obligation, to buy gold with a call option or sell gold with a put option at a set price before the option expires. Call options gain value when gold prices rise, while put options gain value when prices fall. These options are mainly traded on the CME COMEX, and traders need a margin brokerage account that allows access to the options market. While gold options are helpful you're hedging or speculating, they also come with losses, so understanding market conditions and having a clear plan is important.  

> **Article Sources**
>
> 1.  CME Group. "[Designated Contract Markets](https://www.cmegroup.com/designated-contract-market.html#comex)." Accessed Feb. 19, 2021.
>     
> 2.  U.S. Federal Election Commission. "[Subject: New York Mercantile Exchange](https://www.fec.gov/files/legal/aos/1994-34/1081087.pdf)," Page 1. Accessed Feb. 19, 2021.
>     
> 3.  CME Group. "[NYMEX](https://www.cmegroup.com/company/nymex.html)." Accessed Feb. 19, 2021.
>     
> 4.  CME Group. "[Gold Option - Contract Specs](https://www.cmegroup.com/trading/metals/precious/gold_contractSpecs_options.html)." Accessed Feb. 19, 2021.