Gold Options: 6 Top Tactics for Leverage (2024)

Gold Market Outlook for 2024

Before we get into the options tactics, let’s do a quick rundown of the macroeconomic forces that are likely to impact the gold market in 2024:

• Rising Inflation – High inflation looks set to persist, which historically lifts gold prices
• Weakening Dollar – An overvalued dollar could decline further, supporting gold
• Stock Market Volatility – Gold tends to rise when equities sell-off, serving as a hedge
• Geopolitical Tensions – Global conflicts involving major powers could intensify, driving demand for safe haven gold
• Supply Constraints – Gold production growth remains lackluster while central bank purchases are rising
• Market Uncertainty – Recession fears, debt levels, and policy unknowns will fuel market volatility

This backdrop provides fertile ground for gold price swings and options trading opportunities. Now let’s get into those tactics to fully capitalize on gold’s potential in 2024!

Part 2 – Top Gold Options Trading Vehicles

When trading gold through options, you need to choose an options contract tied to a gold investment vehicle. Here are some of the top options to consider for liquidity and gold exposure:

• SPDR Gold Shares ETF (GLD) – The biggest gold-backed ETF with active options
• iShares Gold Trust ETF (IAU) – Lower priced alternative to GLD, good for smaller accounts
• VanEck Gold Miners ETF (GDX) – Provides exposure to gold mining stocks
• Gold Futures Options – For the most direct exposure to gold prices
• Options on individual gold mining stocks – e.g. Newmont Corp (NEM), Barrick Gold (GOLD)

Focus on options with decent trading volume and bid-ask spreads for smooth order execution. Also consider diversifying across several vehicles like an ETF, futures, and mining stocks.

Now, let’s get into those leveraged options tactics and strategies!

Long Call Options

One of the most basic options trading tactics to leverage gold upside is buying long call options. Calls provide leveraged profit potential when gold prices rise. For example:

– Buy GLD June 2024 120 Calls @ $5.00 per contract

– GLD shares currently trade for $100. If GLD rises to $130 by June 2024 expiry, the call option will be worth at least $10 intrinsic value (130 – 120 strike). That’s a 100% return on your $5.00 call option purchase. The GLD shares would only be up 30% in that same move. Calls provide greater upside leverage!

The main downside is you lose your full call premium paid if GLD stays below 120 at expiration. Define your risk accordingly with position sizing.

Long Put Options

To take advantage of declining gold prices, buying long put options allows for leveraged profits. Puts gain value when gold falls. For example:

• Buy GLD September 2024 100 Puts @ $3.50 per contract
• If GLD shares fall to $90 by September 2024 expiration, your puts will be worth at least $10 intrinsic value (100 strike – 90). That’s nearly a 200% return from the $3.50 put premium paid!

Puts harness bearish moves in gold for exponential gains compared to short selling GLD shares directly. Manage risk with stop losses on long puts.

Put Credit Spreads

Up to this point, we’ve focused on long calls and puts. But there are options spread tactics that can provide leveraged returns with defined, capped risk. One such spread is the put credit spread.

Put credit spreads involve selling a put option and simultaneously buying a lower strike put to create a net credit. You profit from the sold put expiring out of the money. Here’s an example:

• Sell IAU March 2024 75 Puts for $2.00 credit
• Buy IAU March 2024 70 Puts for $1.00 debit
• Net credit received is $1.00

If IAU stays above 75 at March expiration, the short 75 puts expire worthless for full profit. The long 70 puts reduce risk if IAU falls below 75. Maximum loss is the $400 difference between the strike prices minus the credit received.

Put credit spreads let you benefit from stable or rising gold prices with strict risk parameters.

Call Credit Spreads

Call credit spreads function like put credit spreads but in the opposite direction for bearish gold expectations. You sell a higher strike call option to collect premium while buying a farther OTM call to finance the trade and limit risk:

• Sell GDX April 2024 $40 Calls for $200 credit
• Buy GDX April 2024 $45 Calls for $100 debit

The short call premium collected caps your profit potential. If GDX closes below 40 at April expiration, both options expire worthless and you keep the full credit. The long 45 call reduces risk if GDX rallies above 40.

In choppy or downward trending gold markets, call credit spreads offer steady returns. You can adjust the strikes based on your market outlook.

Protective Puts

If you have existing gold exposure through ETFs or mining stocks, protective puts are a great hedging tactic to shield against losses from gold declines. Here’s how they work:

• Own 100 Shares of GOLD mining stock at $25 per share
• Buy GOLD September 2024 20 Puts ~ $2.00 per contract

If GOLD shares fall to $15 by September expiration, your puts offset that drop since they’d be worth $5 intrinsic value. This limits your downside. Upside remains unlimited from your stock position.

Protective puts are like insurance policies for gold related assets. They provide peace of mind for investors worried about short-term pullbacks.

Covered Calls

If you own gold ETF shares, covered calls allow you to generate income from your long position. You sell call options against the shares you already hold:

• Own 200 GLD shares at $105
• Sell GLD August 2024 110 Calls for $3.00 per contract

If GLD stays below 110 through August expiration, you keep the $3.00 call premium as profit. If GLD rallies above 110, your shares may get called away at that strike, but you still keep the premium.

Covered calls provide steady income during sideways or downward drifting gold prices. The strike can be adjusted based on your outlook.

Risk Management Is Crucial

While the options trades discussed offer defined and capped risk, it’s still essential to utilize prudent risk management:

• Stick to position size limits based on your account size and risk tolerance. Don’t risk too much on a single gold options trade.
• Use stop loss orders to contain losses from unprofitable gold option positions.
• Buy more time until expiration to give trades time to work. Avoid expirations less than 60 days out.
• Hedge positions using options on correlated assets like silver, copper, oil, and gold mining stocks.
• Spread risk across a variety of option strategies rather than just speculating on direction. Combine different spreads.
• Set a maximum loss amount you’re willing to accept on new positions. Stick to it!
• Review losing trades and learn from them. Don’t simply double down or revenge trade.

Adjust Tactics for Market

One key to success with gold options is adapting your strategies and strikes to evolving market conditions. When gold enters a new trend, utilize these adjustments:

Bull Market

1. Use higher bullish strike prices on call options and credit spreads
2. Buy longer dated calls to ride the upside trend
3. Tighten long put strikes to capture bearish pullbacks

Bear Market

1. Use lower bearish strike prices on put options and credit spreads
2. Buy longer dated puts to benefit from the downward trend
3. Tighten long call strikes to benefit from bear market rallies

Choppy Market

1. Use iron condors and double diagonals to profit from rangebound gold prices
2. Buy straddles to benefit from volatility expansion in either direction
3. Go neutral with butterfly spreads to maximize profit within a price range
4. Sell strangles to collect premium, managing winners with rollouts

The key is staying nimble – don’t get married to any one strategy. Adapt your strikes and tactics to changing market conditions and sentiment. Take advantage of swings by legging into debit spreads at opportune entry points.