An option is simply the right to buy (a ‘call’ option) or sell (a ‘put’ option) a quantity of any asset by an agreed expiry date for a fixed (‘strike’) price.
As with insurance policies, the buyer of an option pays a non-refundable premium to the seller for the right to either exercise the option before it expires, or abandon it. So, someone who holds gold and is worried about the price falling but doesn’t want to sell in case they are wrong could buy a threemonth ‘put’ option instead.
Should gold fall over the three months it can be delivered to the option seller at the higher fixed strike price rather than the market price. Should gold rise, the buyer can abandon the option, hold onto their gold and just suffers the option premium cost.
• Watch Tim Bennett’s video tutorial: What are options and covered warrants?