Precious Metals Options Explained: Gold & Silver Options

Precious metals like gold and silver are often regarded as safe-haven assets, frequently sought after by investors and traders as a potential hedge against inflation.

These metals have long been attractive for their historical value, scarcity, and widespread demand.

As a result, their prices tend to appreciate over time, which can make them increasingly expensive and less accessible for those looking to diversify their portfolios with them.

However, there is an alternative way to gain exposure to these commodities without having to purchase or hold the metals themselves physically.

Metal options CFDs (Contract for Difference), such as those offered on Plus500, provide a way to get exposure to the price movements of precious metals like gold, silver, and other commodities without the need for direct ownership.

Let's take a closer look:

TL;DR

• Precious Metals (gold, silver) are safe-haven assets sought for their value, scarcity, and inflation protection.
• They tend to appreciate over time but can become expensive and less accessible.
• Options CFDs let you speculate on the price movements of metals like gold and silver without owning them physically.
• These contracts offer leverage, flexibility (buy or sell), and lower capital requirements than owning the metals directly.

What Are Precious Metals?

First, it is important to know what precious metals are. Precious metals, as the name suggests, refers to metals that are considered rare and valuable for the following reasons:

• They are scarce in nature.
• They often retain their value in the face of inflation.
• They have a wide range of uses.
• They are in high demand.

What Are Options?

Options are financial derivatives that grant traders the right, but not the obligation, to buy or sell an underlying asset (e.g. stocks, commodities, currencies) at a set price within a defined time period.

Although options involve risk, they can offer greater cost efficiency compared to other investment strategies. In some cases, they may present lower risk than owning stocks directly.

Additionally, options can provide the potential for higher percentage returns and offer investors flexible strategies for managing their portfolios.

What Are Gold Options & Silver Options CFDs?

For traders looking to access metal options without the need to own the underlying instruments, Plus500's Options CFDs can be suitable.

Options CFDs are leveraged instruments, meaning both potential gains and losses are amplified.

Moreover, these contracts offer flexibility, allowing traders to go long or short, depending on market conditions.

This creates opportunities for hedging, speculation, and portfolio diversification, making them an attractive choice for traders seeking to potentially capitalise on market movements.

Plus500's metal options include gold options CFDs and silver options CFDs, which allow traders to speculate on the price movement of gold and silver without owning the physical commodity.

You can read more about options CFDs in our article titled "CFD Options Trading: How to Trade Options CFDs".

Where Are Precious Metals Options Traded?

Precious metals options are mostly traded on the COMEX (Commodity Exchange Inc.), CME Group (Chicago Mercantile Exchange), LME (London Metal Exchange), Tokyo Commodity Exchange (TOCOM), Eurex (European Exchange), or are traded over the counter (OTC market).

Types of Gold Options & Silver Options CFDs

By familiarising themselves with the different types of gold and silver options CFDs, traders can decide whether this type of options CFD really suits their needs or not.

There are two types of precious metal options CFDs, and these are as follows:

• Call Options CFDs: Traders speculate on the increase in the value of a call option, which gains value as the underlying asset's price rises.
• Put Options CFDs: Traders speculate on the increase in the value of a put option, which gains value as the underlying asset's price falls.

Precious metals Options vs Precious metals Futures

Besides options, precious metals are traded in the form of futures contracts.

Futures contracts obligate the buyer to purchase, or the seller to sell, an asset at a predetermined price on a specified date, while options give the buyer the right, but not the obligation, to buy or sell an asset at a set price within a specific time period.

Moreover, precious metals are often traded through futures contracts, and while options and futures can overlap, they are distinct financial instruments.

What are the contract specifications of Gold Options & Silver Options?

Gold and Silver options contracts have specific details that define their terms.

For both metals, the contract size is 100 ounces for gold and 5,000 ounces for silver. The strike price represents the agreed-upon price at which the underlying asset can be bought or sold.

Options contracts typically expire on the third Friday of the contract month. The premium, paid upfront, is the cost of purchasing the option, which grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) the asset.

Settlement can be either physical, where the actual commodity is delivered, or cash-settled, depending on the contract terms.

What Are the Pros and Cons of Trading Precious Metals Options?

Advantages:

• Inflation Protection: Precious metals often retain or increase in value during periods of inflation.
• Physical Asset: Unlike financial assets like stocks or bonds, they are tangible and can be physically owned.
• Portfolio Diversification: They offer a way to diversify investment portfolios, potentially reducing risk.
• Long-Term Value: Historically, precious metals have been considered a reliable store of wealth.
• Global Recognition: These metals are valued worldwide, with strong international demand.
• Safe Haven Investment: They are seen as a reliable investment during economic instability or market crises.

Disadvantages:

• Price Volatility: The prices of precious metals can be highly unpredictable and subject to sudden changes.
• No Income Generation: Unlike stocks, they do not generate dividends or interest.
• Storage and Insurance Costs: Physical metals require safe storage and protection, which can add additional expenses.
• Transaction Fees: Buying and selling precious metals can involve high fees and premiums.
• Limited Capital Appreciation: Precious metals may not offer significant growth potential. They also don't produce income or dividends.
• Market Influence: Prices may be affected by external factors like government policies or large-scale institutional actions, which can distort market values.

Conclusion

In conclusion, precious metals like gold and silver offer a safe haven during inflation, but investing in them doesn't require owning the physical metals. Options CFDs, such as those on Plus500, allow traders to speculate on price movements with flexibility and leverage. However, these instruments come with risks, including volatility and the potential for amplified losses. Understanding the terms and strategies involved is key to making better informed investment decisions.

If metals options CFD trading interests you, you can open a trading account with Plus500 today.

FAQs

Can you buy options on gold & silver?

Yes. You can buy options contracts on both gold and silver.

What is the condition for exercising gold options and silver options?

If the buyer can exercise their call option when gold is trading at a substantially higher price than the strike price, they would profit by doing so.

How do gold options & Silver options differ from physical gold & silver?

Gold options provide traders with the ability to speculate on gold prices while requiring less capital upfront than purchasing physical gold or engaging in gold futures contracts.

At what time of day do gold options and silver options expire?

Based on the daily settlement price of the relevant futures contract for its underlying asset (Gold at 1:30 p.m. ET, Silver at 1:25 p.m. ET, Copper at 1:00 p.m. ET) on the final trading day of the weekly options.