what is the safe-est way to use options to profit from the short term increases in the price of gold?

Question

I know no it is always a danger of dips in the market.Should I only buy the stocks?

Answer 1

In one way, jj gave you an excellen answer suggesting you buy a call spread on gold futures. However, I think the answer left out some important information.

One important thing you need to understand is that you have a larger probablility losing 100% of your investment with a call spread than you would have if you simply bought a gold ETF (exchange traded fund). What makes it safer is that you can invest a smaller amount. If you invest the same amount in a gold ETF and in a call spread, the call spread is a much riskier investment.

If there are options available for a stock or an ETF you can use options to reduce the risk by taking an option position that offsets your position in the stock or ETF.

In general, buying an ETF is less risky than buying the stock of an individual company, so if you want to reduce risk I suggest you start with an ETF.

The only gold ETF I know that has exchange traded options is GDX, which is actually an ETF of gold mining companies. Once you own the ETF you can reduce the risk of owning it with options different ways. The way I would recommend is selling covered calls.

When you write covered calls you can choose a strike price. The lower the strike price you choose, the more protection you get from a downturn in the ETF price, but you also reduce the maximum profit you can make by picking a lower strike price. Higher strike prices offer less protection but give you more potental profit.

Answer 2

The safest strategy is to buy call spreads on gold futures. You can't lose more than the premium you pay, so your risk is limited, even if gold falls rapidly instead of rising. If it does rise, you can sell back the call spreads at a profit. Using a spread will help mitigate the time decay you would incur if you just bought outright calls. If you're going for a short-term rise, buy a short-dated call spread like April or May 2007.

Answer 3

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