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INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver Options1

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsAbout the eBook CreatorDrew Rathgeber is a senior broker at Daniels Trading. He has been heavily involved innumerous facets of the silver & gold community for over 10 years and has a firm understanding of howthe intricacies of the silver markets work. He started his career trading physical spot metals dealing insilver and gold, coins and bars. In 2006, he became a licensed Series 3 trader, trading all futuresmarkets, but specializing in precious metals. Drew has handled everything from complex deliveriesto physical hedging, and has seen it all when it comes to the precious metals complex. He also authorsa newsletter titled “The Rath Overlay” that is published on a weekly basis to help the everyday traderfurther 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 theidea 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 costeffective solution, and one could even call it the “Wholesale Market” when compared to Physical, Spot, or ETF’s. Any investor thathas ANY silver allocation should learn silver futures. Initially, there will be a few difficult concepts to learn and understand, butstick 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 decadeof experience to share with you.Direct Phone: 1-312-706-7657Toll-Free: 1-866-276-1475Email: drathgeber@danielstrading.com2

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsIntroductionIf you are looking for alternative investment options when it comes to investing in gold and silver that is customized to your riskversus reward profile, then gold and silver options may be for you. If you currently have a gold or silver physical position, then thisis a must read and can be an invaluable guide for any gold or silver investor. Learning about gold and silver options may seem like adaunting task at first. However, this is your money and there are real consequences, so at a minimum every gold and silver tradershould 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 MAYLOSE MORE THAN THE FUNDS YOU INVESTED.Outright physical futures contracts can be very volatile. With gold and silver options, you can potentially utilize a tremendousamount 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 OFLEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FORYOU 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 youwill eventually get it.Advantages of Purchasing Gold & Silver OptionsWhen purchasing options, you don’t have the dreaded margin call. You can control 100oz of gold or 5000oz of silver and whatyou 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 thepotential of your contract sizes can be larger.3

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsWhy 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 moreexpensive “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 physicalfutures. For example, an option purchaser is only risking his or her premium paid for an option. To reiterate, there are nomargin calls when you purchase options. Furthermore, you can mitigate more risk by trading a bull call spread, bear call spread, orstraddles. 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 LONGOR SHORT POSITION.TerminologyCall Option – An agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or otherinstrument 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 underlyingsecurity at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buyshares.Strike Price – The price at which a specific futures contract can be exercised. Strike prices are mostly used to describe futuresoptions, in which strike prices are fixed in the contract. For call options, the strike price is where the commodity can be bought (upto 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 ofprofit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximumamount 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.4

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsOut of the Money – A call option with a strike price that is higher than the market price of the underlying asset, or a put optionwith a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, butonly possesses extrinsic or time value. As a result, the value of an out of the money option erodes quickly with time as it gets closerto 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 givesthem the right, but not the obligation, to buy or sell an asset at a predetermined price, which is called a strike price, within a giventime period, that is on or before the expiration date. If the investor chooses not to exercise that right, then the option expires andbecomes 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 MAYLOSE 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 aderivative.ExampleFor example, with respect to call options, a delta of 0.7 means that for every 1 the underlying stock increases, thecall 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 theoption will decrease. So a put option with a delta of -0.7 will decrease by 0.70 for every 1 the underlying increasesin 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 optionnears 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 wastingassets, their value declines over time. As an option approaches its expiry date without being in the money, its time valuedeclines 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 itsimple by focusing on the core option terminology.Source: www.investopedia.com5

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsTimeOne of the major factors with silver options is time. The amount of time you have to reach or go through your “strike” price iscrucial. If it doesn’t reach or go through the strike price, then it will expire worthless, creating losses. I’m going to break this downand try to make this as simple to understand as possible. Just remember, “Time equals money”. The more time in an option, themore it will cost. For instance, if you buy an option with only 30 days till expiration, it will be significantly cheaper than an optionexpiring in 90 days. See below for an example. Each month represents an option month and subsequent expiration. Multiply thecents by the contract specification of 5000oz (silver) to get your total cost for “time” in this example.6

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsSilver 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 moreexpensive an option will be. The further out or less likely it will reach a specific target means cheaper option prices. Please reviewthe 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 basisfor a 20.00 strike is 5,000.7

INDEPENDENT. OBJECTIVE. RELIABLE.Options Basics & Essentials:The Beginners Guide to Trading Gold & Silver OptionsGold 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 anoption will cost. The further out or less likely it will reach a specific target means cheaper option prices. Here’s how it works: takethe point costs (let’s use 1,325 as the “strike price” which is 70.0 below). We multiply this by 100 (contract specification) whichequals to 7,000 and is your total cost for this option.8