The advent of the exchange-traded fund ETF has ushered in a new era for investors. In the old days, if an investor wanted a portfolio of small cap stocks or large cap stocks or growth or value plays, the only choice was to identify a basket of stocks that appeared to fit the desired criteria and to buy as many of those stocks as one's capital would allow.

Likewise, individuals who wanted to trade currencies and physical commodities had little choice but to venture into the realm of futures trading. Today, via the purchase of the proper ETF, an investor can gain exposure to investments in a wide variety of investment vehicles and "styles".

Options On Gold And Silver ETFs

In fact, a vast array of commodity products can now be traded as easily as one would buy or sell an individual stock. Exchange-Traded Fund ETF Investing. Two of the most heavily traded metals market ETFs are SPDR Gold Trust and iShares Silver Trust in this article, we will be using their prices from as examples. Both of these ETFs are designed to track the price of the underlying precious metal in their names. GLD tracks the price of gold bullion divided by a factor of SLV tracks the actual price per ounce of silver bullion.

For most investors this is a much simpler process than buying the physical metal which involves additional storage and insurance costs or buying futures contracts. To learn more, see The Gold Showdown: A Quick Primer on Options on ETFs Many popular ETFs - including GLD and SLV - now have call and put options available for trading.

A call option gives the buyer the right but not the obligation to buy shares of the underlying security up until the time the option expires. A put option gives the buyer of the option the right but not the obligation to sell shares of the underlying security up until the time the option expires. A call option will typically rise in price as the price of the underlying security rises; a put option will typically rise in price as the price of the underlying security declines.

Option trading strategies open up a wide array of possibilities for traders. The primary advantages to trading options is that doing so can allow a trader to enter into a bullish, bearish or neutral position i. Option trading also offers traders the potential opportunity to speculate on price direction at a fraction of the cost of buying the underlying security itself.

For a background on options, see our Options Basics Tutorials. The primary risk associated with buying call or put options is that they have a limited life and an expiration date, after which they cease to exist. If the underlying security fails to move in the anticipated direction prior to option expiration, it is possible that an option that you purchased may expire worthless or the strategy that you are using may run out of time to reach its objective.

Playing a Rise in the Price of Gold Using Call Options Let's look at a bullish option trade using options on the ETF ticker symbol GLD. As you can see in Figure 1, on the date indicated by the upward pointing arrow, the day moving average for GLD crossed back above its day moving average.

In addition, GLD had just recently moved above its day moving average. A simple analysis might conclude that gold was re-establishing a bullish trend and that the price of gold may soon move higher.

This would however, involve putting up and maintaining the required amount of margin money and would also expose a trader to unlimited risk on the upside if silver suddenly rocketed higher. A less expensive and far less risky alternative would be to buy an at-the-money put option. Figure 6 displays the risk curves for this trade. The breakeven price for this trade is equal to the strike price plus the premium paid. But remember, the trade does not have to be held until expiration.

Terms Beginning With D | Investopedia

A trader could simply to sell the option if it rises in price rather than exercising it and buying the underlying shares. Playing a Decline in the Price of Silver Using Put Options Now let's look at a bearish option trade using options on the ETF ticker symbol SLV, which tracks the price of silver bullion. As you can see in Figure 4, on the date indicated by the downward pointing arrow the day moving average for SLV crossed back below its day moving average.

In addition, SLV also moved back below its day moving average. A simple analysis might conclude that silver was re-establishing a bearish trend and that the price of silver may soon move lower.

This premium represents the maximum amount that the option trader would risk on the trade. At the time of purchase this option has days left until expiration.

For a look at short selling, see Finding Short Candidates With Technical Analysis. The Bottom Line Precious metals have long held something of a mystique for many investors. However, they have also long been out of reach to the majority of investors.

Precious metals based ETFs have opened up a way for traders and investors to access these markets and options on these ETFs allow traders to take advantage of a variety of low-risk, high potential methods that simply were not available to them previously.

In both of the examples shown here, a trader was able to play the metals markets in a particular direction without having to buy or sell short either the physical bullion or a futures contract. In each case the trader enjoyed not only a limited dollar risk but a smaller outlay and a lower dollar risk than he would have been exposed to had he simply bought or sold short the underlying shares.

These trades only scratch the surface of the potential opportunities available using options on gold and silver ETFs. For an in-depth look at ETFs, check out our Investopedia Special Feature — Exchange Traded Funds. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin?

This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Options On Gold And Silver ETFs By Jay Kaeppel Share. Exchange-Traded Fund ETF Investing Two of the most heavily traded metals market ETFs are SPDR Gold Trust and iShares Silver Trust in this article, we will be using their prices from as examples.

Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons. Trading options is not easy and should only be done under the guidance of a professional. The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.

Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.

This strategy allows you to stop chasing losses when you're feeling bearish. A brief overview of how to profit from using put options in your portfolio. Learn about options strategies for the metals and mining sector, such as call and put options for gold exchange-traded funds, Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered Learn about investing in put options and the associated risks.

Explore how options can provide risk, which is precisely defined It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. A period of time in which all factors of production and costs are variable.

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