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Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver Options

Options Basics & Essentials: The Beginners Guide to Trading Gold & Silver Options


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About the eBook Creator

Drew Rathgeber is a senior broker at Daniels Trading. He has been heavily involved in

numerous facets of the silver & gold community for over 10 years and has a firm understanding of how

the intricacies of the silver markets work. He started his career trading physical spot metals dealing in

silver and gold, coins and bars. In 2006, he became a licensed Series 3 trader, trading all futures

markets, but specializing in precious metals. Drew has handled everything from complex deliveries

to physical hedging, and has seen it all when it comes to the precious metals complex. He also authors

a newsletter titled “The Rath Overlay” that is published on a weekly basis to help the everyday trader

further their understanding of the futures markets.

Authors Note: I remember when I was trading the physical and spot market, silver futures seemed very intimidating, so I had the

idea to create this Beginners Guide to Silver Futures to help everyday people. Remember, these are real markets with real money.

Undoubtedly, there are many schemes and ways of going about investing in silver. Still, the futures market is by far the most cost

effective solution, and one could even call it the “Wholesale Market” when compared to Physical, Spot, or ETF’s. Any investor that

has ANY silver allocation should learn silver futures. Initially, there will be a few difficult concepts to learn and understand, but

stick with it and you will learn and appreciate the significant advantages of silver futures.

When it comes to the silver market, you need a professional trader that talks straight. I’m here to help and have more than a decade

of experience to share with you.

Direct Phone: 1-312-706-7657

Toll-Free: 1-866-276-1475

Email: [email protected]

mailto:drathgeber%40danielstrading.com%20?subject=



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Introduction

If you are looking for alternative investment options when it comes to investing in gold and silver that is customized to your risk

versus reward profile, then gold and silver options may be for you. If you currently have a gold or silver physical position, then this

is a must read and can be an invaluable guide for any gold or silver investor. Learning about gold and silver options may seem like a

daunting task at first. However, this is your money and there are real consequences, so at a minimum every gold and silver trader

should learn about options and how they work.

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY

LOSE MORE THAN THE FUNDS YOU INVESTED.

Outright physical futures contracts can be very volatile. With gold and silver options, you can potentially utilize a tremendous

amount of leverage, while at times exposing yourself to limited risk when purchasing these options.

What is an Option?

THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF

LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR

YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.

An option is the right, but not the obligation, to buy or sell something at a predetermined price within a specified period of time.

Author’s Note: I know your head just spun around in circles with this aforementioned statement. Stay with me, I know you

will eventually get it.

Advantages of Purchasing Gold & Silver Options

When purchasing options, you don’t have the dreaded margin call. You can control 100oz of gold or 5000oz of silver and what

you pay in premium is what you risk. There is an option strategy available for every market environment: sideways, uptrend,

downtrend, and even hedging opportunities. Also, unlike the GLD & SLV, your trading costs can be much lower while the

potential of your contract sizes can be larger.



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Why Gold & Silver Options?

First, gold and silver options can potentially offer limited downside risk. Second, they are traded via centralized exchange,

and third, they are extremely liquid. You can purchase cheap “Out of the Money”, expensive “Near the Money” or even more

expensive “In the Money” options – it’s your choice.

Again, gold and silver traders can reduce their risk exposure by using gold and silver options rather than outright physical

futures. For example, an option purchaser is only risking his or her premium paid for an option. To reiterate, there are no

margin calls when you purchase options. Furthermore, you can mitigate more risk by trading a bull call spread, bear call spread, or

straddles. These can be useful strategies to employ while still giving you exposure to a market move.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG

OR SHORT POSITION.

Terminology

Call Option – An agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other

instrument at a specified price within a specific time period.

Put Option – An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying

security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy

shares.

Strike Price – The price at which a specific futures contract can be exercised. Strike prices are mostly used to describe futures

options, in which strike prices are fixed in the contract. For call options, the strike price is where the commodity can be bought (up

to the expiration date), while for put options the strike price is the price at which shares can be sold.

The difference between the underlying security’s current market price and the option’s strike price represents the amount of

profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum

amount that can be lost is the premium paid.

In the Money –

For a call option: when the option’s strike price is below the market price of the underlying asset.

For a put option: when the option’s strike price is above the market price of the underlying asset.

Being in the money does not mean you will profit, it just means the option is worth exercising.

This is because the option costs money to buy.



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Out of the Money – A call option with a strike price that is higher than the market price of the underlying asset, or a put option

with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but

only possesses extrinsic or time value. As a result, the value of an out of the money option erodes quickly with time as it gets closer

to expiry. If it is still out of the money at expiration, the option will expire worthless.

Expiration Date – The last day that an options or futures contract is valid. When an investor buys an option, the contract gives

them the right, but not the obligation, to buy or sell an asset at a predetermined price, which is called a strike price, within a given

time period, that is on or before the expiration date. If the investor chooses not to exercise that right, then the option expires and

becomes worthless, and the investor loses the money paid to buy the option.

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY

LOSE MORE THAN THE FUNDS YOU INVESTED.

Delta – The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a

derivative.

Example

For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the

call option will increase by $0.70.

Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the

option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases

in price.

As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option

nears expiration, it will approach a delta of -1.00.

Time Decay – The ratio of the change in an option’s price to the decrease in time to expiration. Since options are wasting

assets, their value declines over time. As an option approaches its expiry date without being in the money, its time value

declines because the probability of that option being profitable (in the money) is reduced.

Option Premium – What someone is willing to pay for a specific “strike” and “expiration” when purchasing options.

Author’s Note: There are many more definitions and complexities, but for the purposes of this eBook, I’m trying to keep it

simple by focusing on the core option terminology.

Source: www.investopedia.com

http://www.investopedia.com/



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Time

One of the major factors with silver options is time. The amount of time you have to reach or go through your “strike” price is

crucial. If it doesn’t reach or go through the strike price, then it will expire worthless, creating losses. I’m going to break this down

and try to make this as simple to understand as possible. Just remember, “Time equals money”. The more time in an option, the

more it will cost. For instance, if you buy an option with only 30 days till expiration, it will be significantly cheaper than an option

expiring in 90 days. See below for an example. Each month represents an option month and subsequent expiration. Multiply the

cents by the contract specification of 5000oz (silver) to get your total cost for “time” in this example.



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Silver Options Price Matrix (Example)

Here is an example of what the silver “options matrix” looks like. The closer you are “To the Money” or “In the Money”, the more

expensive an option will be. The further out or less likely it will reach a specific target means cheaper option prices. Please review

the graph below and note that the market strike is $1.00. In this example, if you multiply the market strike by 5,000, the cost basis

for a $20.00 strike is $5,000.



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Gold Options Price Matrix (Example)

Another example is the gold “options matrix” below. The closer you are “To the Money” or “In the Money”, the more expensive an

option will cost. The further out or less likely it will reach a specific target means cheaper option prices. Here’s how it works: take

the point costs (let’s use $1,325 as the “strike price” which is 70.0 below). We multiply this by 100 (contract specification) which

equals to $7,000 and is your total cost for this option.



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Quick Recap

Delta – The ratio comparing the change in the price of the underlying asset to the corresponding change of the futures

contract.

Example

For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying increases, the call

option will increase by $0.70.

Put option deltas, on the other hand, will be negative, because as the underlying increases, the value of the option will

decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price.

As an in-the-money call option nears expiration, it will approach a delta of 1.00 and as an in-the-money put option

nears expiration, it will approach a delta of -1.00.

Author’s Note: So if you have a delta of .50, for every $1.00 move in price movement, the option value will decrease or

increase by 50% of the move. Closer to the money options, the delta will increase and vice versa. Further away from the

money, your delta will decrease.

Time – Time equals money. The more time you purchase, the more your option will cost. Thirty days of time will be significantly

cheaper than 90 days of time.

Strike Price – This is your “target” price the market must reach in order to be “In the Money.” In the money options, the delta

usually increases, therefore increasing profit potential. If it doesn’t reach this target by the expiration date, you will lose the

premium you paid for the option, creating losses.

Time Decay – Keep in mind that once you purchase a call option or put option and the market stagnates or doesn’t go

anywhere, you will lose money each day, due to the Time Decay (Theta).

Out of the Money – The further you go out of the money, two things will happen:

1. The option will become cheaper in either direction above or below the market.

2. The delta will also decrease.



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In the Money – Once the market price goes through and beyond your “strike price.”

Option Premium – What you pay for a specific strike and expiration of an option. Realize when purchasing an option, what you

risk is what you pay. No margin calls.

Contact

Any questions please contact me at 1-866-276-1475 or 1-312-706-7657.

Last Note: Due to the complexities with trade execution, I highly advise finding a good broker with experience. Using a

broker for trade execution can be invaluable for price discovery and managing option trades. There is a lot going on, and it’s

easy to make errors, especially when you’re new to options.



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DISCLAIMER

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED.

THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE “RISK DISCLOSURE” WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICES.

THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.

http://www.danielstrading.com/legal-notices/risk-disclosure/

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