# INDEPENDENT. OBJECTIVE. RELIABLE. Options Basics & Essentials: The Beginners Guide to Trading Gold & Silver Options

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1 INDEPENDENT. OBJECTIVE. RELIABLE. 1

5 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 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: 5

6 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. 6

7 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. 7

8 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. 8

9 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 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. 9

10 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 or 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. 10

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