Gold options are financial securities that give the buyer of the option the right but not the obligation to purchase gold on a future date. The most liquid types of gold options are options on futures and options on exchange-traded funds. Gold options are traded with the use of margin. Gold options that are traded within a margin account can be subject to a margin call.
Gold Options Basics
A call option on gold is the right to purchase gold at a specific price on or before a certain date. The price at which the buyer and seller exchange gold is called the strike price, while the date when the option will expire is the expiration date. When purchasing a gold option, the buyer will pay the seller a premium that is equal to the market value of the gold option.
Gold Futures and ETFs
A gold futures contract is an agreement between two parties to buy or sell gold at a future date. Futures contracts are traded on exchanges such as the New York Mercantile Exchange, and they fluctuate daily with market sentiment. Exchange-traded funds, such as the Spider Gold Shares Trust (NYSE: GLD), hold gold futures contracts as an asset, and the fund is traded like a stock on the New York Stock Exchange.
Margin With Options on Futures and ETFs
When trading gold options on futures or ETFs, an investor will be required to post margin, which allows her to purchase or sell gold with borrowed money, using the securities as collateral. Margin requirements are different for each exchange that clears gold options. For example, the Chicago Mercantile Exchange uses a calculator called the standard portfolio analysis -- or SPAN -- risk array to calculate margin on gold options. Exchanges require a margin deposit, which protects the clearing exchange from losses an investor might experience due to adverse movements in gold prices.
Margin Calls on Gold Options
A margin call occurs when the money in an investor's brokerage account dips below a specific threshold calculated by the clearing exchange. When this occurs, a broker will prompt an investor to either add additional capital to the account or sell his positions. Margin calls occur on gold options, but only for option sellers. An option buyer is required to post margin equal to the premium paid for the option. Since an option buyer cannot lose more on an option than the premium paid for the option, a margin call will not occur. A seller of a gold option can experience losses beyond the premium received for the option and therefore can experience a margin call if gold prices move against the option seller.
David Becker is a finance writer and consultant in Great Neck, N.Y. With more than 20 years of experience in trading, he runs a consulting business that focuses on energy hedging and capital market analysis. Becker holds a B.A. in economics.