 |
|
GOLD FUTURES TRADING
Have you been watching gold and silver? Both of these precious metals (see charts at right) have captured the attention of many investors, including
the beginning trader contemplating their first step into the commodity markets.
Unfortunately,
the increased volatility accompanying the higher price levels of gold and silver has made buying and selling a traditional futures contract
too expensive for many investors, especially the beginning futures trader with limited risk capital. For example, to buy
or sell one gold contract* requires $5,739 in margin while a silver
contract* requires $6,750 in margin. (Source: CME Group. Values are as of June 11, 2010. Values may change.) Higher implied volatility
has, in turn, inflated option premiums as well, making considerable the cost of a simple put or call option purchase.
How then can the beginning gold or silver trader who wishes to limit risk or who has only modest risk capital participate in the
precious metal markets?
Low-Risk Gold & Silver Investment Strategies
The beginner looking to trade gold and silver but in a way that is less risky than a traditional futures contract has three basic strategies:
Trade E-mini gold or silver contracts. CME Group lists E-mini futures
contracts in gold and silver that are significantly less risky and, correspondingly, less expensive than their regular-sized
counterparts.* Investors can trade direction by simply buying or selling futures contracts. For information on these contracts,
please see the box at right.
If this is to be your first step into the world of commodity trading, then before you take that step,
you must have a trading plan. A trading plan provides clear rules of when a trade is established and when it is
closed, either at a profit or a loss. Developing a reliable trading plan and then following it, without being led
astray by emotion, is the key to trading responsibly. Our Course called,
Commodity Trading as a Second IncomeTM will
explain the basics of the commodity markets and teach you a
trading plan, complete with case studies and actual trade examples, that is ideal for the beginner or anyone looking to trade
commodities as a second income.
Trade gold or silver option spreads. When the price of a call or put option is considered to be too expensive, the beginning trader
can instead buy an option spread. The two types of option spreads of interest are the Bull Call Spread, bought when prices are expected
to rally, and the Bear Put Spread, bought when prices are expected to fall. Each of these spreads is
constructed by simultaneously buying one option and selling another. The option sold helps to offset the cost
of the option purchased, thus making the trade more affordable - even when implied volatilities are high. In return, though, maximum gain is limited.
Even so, these option spreads can generate impressive percentage returns while at the same time limiting the downside risk to a known
and fixed amount, the latter of which is a distinct advantage to the beginning trader.
Bull Call and Bear Put Spreads are extremely versatile: By varying the strike prices, an investor can construct a spread that has the cost and pay-out structure
most beneficial given their price expectations. For more information, please see, "Gold & Silver Option Spread Strategies" at right.
You may also want to visit our specialty web site on buying commodity options where you'll find, among
other topics, detailed examples on buying gold call and put options and option spreads.
Buy gold binary options. Binary options are a novel type of investment vehicle that appeal to the beginning trader because they are
simple to understand: If you feel that prices will rise, then invest in a binary call option and if you feel that prices will fall, then invest in a binary put option.
Binary options usually expire in an hour or less and if your price expectation is
correct, can provide a rate of return as high as 70% - even if prices only move one tick
in your favor. There is no margin required and no risk of losing more than the amount
initially invested, which can be as little as U.S.$30. See
our Binary Options site for more information.
Buyer Beware
Many investors, especially the beginning trader, may not be aware that gold languished
beneath the $300 level in 2001 while silver was under $5 per ounce. The phenomenal rise in price of these metals since then
has been fueled in no small part by investor perceptions and expectations. (See "What's Driving Gold and Silver Prices" at right.)
Perceptions and expectations can change quickly - especially among speculators - leading
to rapid selling. Consequently, gold prices can collapse suddenly and without warning. For this reason, the low-risk strategies
described above, especially the option spread trades, are a good idea not just for the beginning gold or silver trader but even for the more
experienced trader.
The silver market provides a good example of the type of price collapse that can happen when perceptions and expectations change.
On Dec 15, 2006, silver closed down almost $1 relative to the previous day, representing a dollar value change of about $5,000 per
contract - arguably a 5-fold increase in what historically had been regarded as a big move in silver. This is the main reason why
the beginning trader should focus on low-risk strategies when trading this market.
|
|
Your next step...
Gold Trading Beginner Silver Trading Beginner
Your next step should be to request the
free set of Gold & Silver
Trading Guides. These brochures written by industry professionals will move from the basic to the more advanced
strategies including option-related strategies. And don't forget to take a look at the recommended books below.
After that, and when you're ready, go ahead and speak with a commodities professional. They'll help you decide if trading
gold and silver is right for you and discuss some of the opportunities provided by these exciting precious metal markets.
You can Talk to a Commodities Professional in the box above.
Recommended Reading...
|
* The gold and silver contracts refer to the regular-sized or full-sized contracts that originated on COMEX, a division of NYMEX, all of which is now
part of the exhange, CME Group. CME Group also lists miNY gold and miNY silver futures contracts that have a contract size, risk and
margin requirement that lie between those of the E-mini contracts and the regular-sized contracts.
© 2010. World Link Futures, Inc. All rights reserved. COMMODITY TRADING AS A SECOND INCOMETM is a trademark of World Link Futures, Inc.
Futures, options and forex trading involves substantial risk and is not for everyone. Only risk capital should be used.
Keywords: gold futures trading, silver futures trading, gold futures, gold options, beginner
Abstract: Low-cost strategies for the beginner gold and silver trader using futures, options on futures and even gold binary options.
|
|
|