Hi there AndyHappy New Year, and I applaud you resolution to...

Hi there Andy

Happy New Year, and I applaud you resolution to read and learn more. I should do the same.

Regarding option: "The key thing to remember is having the right to take something (gold) as against the obligation. If you take a fee (premium) for a position you will be obliged to take delivery and could be at a substantial financial risk."


Options trading can be complicated, whether you buy or sell. I had a go at trading interest rate options in my FRA book in the early '90s and found that I made much less money than trading futures for a given amount of risk. I wasn't very good a managing time value.

You can get the direction of a market right, and still lose money. Example: A bullish trader pays $40 for a three month $1300 strike gold call when the price is $1240 and the price rises to $1300 in three months. The trader loses $40 (the premium) in spite of being right on market direction.

Options trading isn't so much about price direction in the underlying commodity, but the speed at which it changes price. (Bank option price makers with portfolios of thousands of contracts, are in and out of the futures market and spot market all the time, hedging out the price risk so they can concentrate on making money from volatility and time decay.) If a market becomes range bound for extended periods, a trader can sell obligations outside the range in relative safety. Historically, a majority of such options expire un-exercised. The trick is not to be "short vol" (sold) when something big happens. Its not unlike selling insurance.

Cheers