How to Trade Options on Gold

Gold prices have been on fire lately, with the yellow metal now hitting multi-month highs. The debate around gold is an interesting one. There’s a lot of investors who swear by gold as a de facto inflation hedge and gold bugs who consider you crazy if you don’t have at least a few ingot nuggets in the safe. But there’s plenty of investors with no exposure to gold and no interest in altering their portfolio to obtain that exposure.

Then of course, there’s plenty of people in the middle. These investors’ exposure to gold usually fluctuates over time. Perhaps they allocate more money to gold when it seems like the metal is going on a prolonged rally. Maybe they pile into gold when the economy is entering more turbulent times. Through one form or another, these investors usually have some form of exposure to gold prices.

That’s the thing with gold: there’s a ton of different ways to gain exposure. With stocks, we usually talk about them in the form of a percentage. As in, 65% of our portfolio is in equities. In other cases, such as  single-company ownership, we gain long exposure by buying the equity, bonds or a fund that has a large allocation to the name, (think something like Apple).

With gold though, there are various means to gain long exposure to the metal. The most obvious form of exposure to gold prices comes by owning physical gold. For instance, items like gold bullion, bars or coins. Broadly speaking, investors can’t trade options on these types of gold investments. That is, with the exception of trading options on gold futures, which is delivered in bar form.

However, these types of investors have different considerations than traditional stock, bond and option investors. They have to consider things like premium markup, delivery and logistics, and storage of the metal.

gold prices

A four-year weekly chart of the GLD ETF.

More Exposure to Gold Prices

For those that want to invest in gold but don’t want the hassle of physical of gold, they can consider the SPDR Gold ETF, which trades under the ticker symbol “GLD.” This is the largest gold ETF, which holds physical gold that’s represented in stock form. Many investors like the GLD for its easy access and simplicity, while many dislike this form of “paper gold” for their lack of having the tangible asset to themselves.

This ETF is optionable, meaning we can trade puts and calls on it. That allows investors to take advantage of all sorts of bullish, bearish and neutral strategies. Covered calls, cash-secured puts, bull call spreads, bear put spreads — you name it, and you can trade it on this one.

The miners are another option. Miners tend to be more volatile than gold prices, at least when viewed as the overall sector. For those that do their homework, they can pick an individual firm to invest in, like Barrick Gold (GOLD), Newmont Mining (NEM) or Kirkland Lake Gold (KL). Most gold-mining stocks will have options available, although some may be too thinly traded to be worth the risk.

If individual miners involve too much research, risk, or investors simply want broad-industry exposure, two ETFs come to mind: The VanEck Vectors Gold Miners ETF trading under the symbol “GDX” and the VanEck Vectors Junior Gold Miners ETF trading under the symbol “GDXJ.”

The GDX has more extreme price moves than gold — in both directions. The GDXJ is similar, with even more extreme price swings. That is to say, when gold prices are on the rise, GDX and GDXJ generally outperform. When gold prices are under pressure, the two ETFs generally underperform the yellow metal.

How to Use Options With Gold

As we touched on before, investors can use options in place of these publicly-traded ETFs and stocks. As it relates to gold, these are as close as it gets without buying actual gold.

Investors could always consider buying and selling gold futures, which operate in a somewhat similar fashion to options. But know that this involves plenty of knowledge of the futures market, a different brokerage account and different risks. For that reason, we are only referring to two ownership options: physical gold and equity forms of gold such as those laid out above.

Because we can’t trade options on physical gold, that only leaves the latter when it comes to the discussion of options. Put simply, investors can use options to trade gold prices just as they would to trade regular stocks. If investors are bullish, they can consider using bullish options strategies, including stock-replacement and stock-enhancement strategies. If they are bearish, they can use a combination of puts and calls to create either synthetic short positions or positions that enhance an existing short position.

Gold isn’t for every investor and therefore using options on them may not apply. But for those that do want exposure and are knowledgeable in options, this is certainly a consideration to think about.