Gold Option Price
Option valuations are not as straightforward as futures valuation. Option
premiums are comprised of intrinsic value and extrinsic value.
An option has intrinsic value if the market is trading
above the strike price of a call option, or below the strike price of a put option. If an option contract has intrinsic value
it is called “in the money.” If an option contract does not have intrinsic value it is called “out of the
money.”
For example:
If
gold is trading at $900, a $870 call option is $30 in the money so the intrinsic value of the option is $3,000.
The extrinsic value of the option is its “time value.” Extrinsic value takes
into account the possibility that an option may go in the money by expiration. The more time that an option has, the more
extrinsic value it has. As an option approaches its expiration date, it looses value. This is called time decay. At expiration
an option has no extrinsic value so if the option is out of the money it expires worthless.
Gold
option prices do not move in tandem with futures prices. A $1 move in your favor in the gold futures market does not necessarily
equal to a $1 increase in the gold option value. The amount that an option value will increase based upon an increase in its
futures price is called its delta. Call option deltas are measures from 0 to 1. As an option goes from “out of the money”
to “in the money” its delta increases.
For example:
If a gold call option has a delta of .5 and the price of the gold futures market increases by $1 the
value of the option will increase by $.50 or $50.
