The buyer of a gold option contract is conferred the right (but not the obligation) to buy or sell a specific amount of gold at a fixed price (strike price) to be delivered on a designated date. This right can be exercised anytime before the option expires but the option buyer can opt not to exercise the option should the price of gold move against him.
The advantage of buying gold options is similar to that of gold futures in that they both provide significant financial leverage. However, unlike a gold futures contract, the gold options contract holder do not have the obligation to buy or sell the underlying gold. Hence, the gold option buyer's downside risk is strictly limited to the cost of the option - i.e. the premium plus any transaction costs.
The disadvantage of gold options is that they can expire worthless if price of gold does not appreciate beyond the strike price within the lifetime of the option.
Another useful aspect of investing in gold options is that, unlike more traditional gold investments such as gold coins or gold stocks which only gain in value when the price of gold goes up, it is possible to profit from a drop in gold price when trading gold options. One can purchase gold put options, which gain in value as gold price falls. Buying gold put options allow the astute gold investor to bet against gold price. An investor with a sizable stash of gold bars or gold coins can also protect the value of his holdings against falling gold price by purchasing some gold put options.
For the novice investor, options trading can be a rather complicated subject. You can learn more about trading gold option contracts at The Options Guide.
How to Start Trading Gold Options
To buy or sell gold options, you need to open a trading account with a broker that handles gold futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.