Buying Platinum Put Options to Profit from a Fall in Platinum Prices

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Contents

Buying Platinum Put Options to Profit from a Fall in Platinum Prices

If you are bearish on platinum, you can profit from a fall in platinum price by buying (going long) platinum put options.

Example: Long Platinum Put Option

You observed that the near-month NYMEX Platinum futures contract is trading at the price of USD 964.00 per troy ounce. A NYMEX Platinum put option with the same expiration month and a nearby strike price of USD 960.00 is being priced at USD 64.27/oz. Since each underlying NYMEX Platinum futures contract represents 50 troy ounces of platinum, the premium you need to pay to own the put option is USD 3,214.

Assuming that by option expiration day, the price of the underlying platinum futures has fallen by 15% and is now trading at USD 819.40 per troy ounce. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying platinum futures at the strike price of USD 960.00. In other words, it also means that you get to sell 50 troy ounces of platinum at USD 960.00/oz on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying platinum futures at the market price of USD 819.40 per troy ounce, resulting in a gain of USD 140.60/oz. Since each NYMEX Platinum put option covers 50 troy ounces of platinum, gain from the long put position is USD 7,030. Deducting the initial premium of USD 3,214 you paid to purchase the put option, your net profit from the long put strategy will come to USD 3,817.

Long Platinum Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 960.00/oz – USD 819.40/oz) x 50 oz
= USD 7,030
Investment = Initial Premium Paid
= USD 3,214
Net Profit = Gain from Option Exercise – Investment
= USD 7,030 – USD 3,214
= USD 3,817
Return on Investment = 119%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the platinum option sale will be equal to it’s intrinsic value.

Learn More About Platinum Futures & Options Trading

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

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Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Platinum Put Options to Profit from a Fall in Platinum Prices

Definition:
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised. The put option writer is paid a premium for taking on the risk associated with the obligation.

For stock options, each contract covers 100 shares.

Buying Put Options

Put buying is the simplest way to trade put options. When the options trader is bearish on particular security, he can purchase put options to profit from a slide in asset price. The price of the asset must move significantly below the strike price of the put options before the option expiration date for this strategy to be profitable.

A Simplified Example

Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month’s time is being priced at $2. You strongly believe that XYZ stock will drop sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ put option covering 100 shares.

Say you were spot on and the price of XYZ stock plunges to $30 after the company reported weak earnings and lowered its earnings guidance for the next quarter. With this crash in the underlying stock price, your put buying strategy will result in a profit of $800.

Let’s take a look at how we obtain this figure.

If you were to exercise your put option after earnings, you invoke your right to sell 100 shares of XYZ stock at $40 each. Although you don’t own any share of XYZ company at this time, you can easily go to the open market to buy 100 shares at only $30 a share and sell them immediately for $40 per share. This gives you a profit of $10 per share. Since each put option contract covers 100 shares, the total amount you will receive from the exercise is $1000. As you had paid $200 to purchase this put option, your net profit for the entire trade is $800.

This strategy of trading put option is known as the long put strategy. See our long put strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points.

Protective Puts

Investors also buy put options when they wish to protect an existing long stock position. Put options employed in this manner are also known as protective puts. Entire portfolio of stocks can also be protected using index puts.

Selling Put Options

Instead of purchasing put options, one can also sell (write) them for a profit. Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

Covered Puts

The written put option is covered if the put option writer is also short the obligated quantity of the underlying security. The covered put writing strategy is employed when the investor is bearish on the underlying.

Naked Puts

The short put is naked if the put option writer did not short the obligated quantity of the underlying security when the put option is sold. The naked put writing strategy is used when the investor is bullish on the underlying.

For the patient investor who is bullish on a particular company for the long haul, writing naked puts can also be a great strategy to acquire stocks at a discount.

Put Spreads

A put spread is an options strategy in which equal number of put option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Put spreads limit the option trader’s maximum loss at the expense of capping his potential profit at the same time.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

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Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

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Platinum Spot Price (XPT)

Platinum Price Today

It’s always important to find accurate updates on the price of platinum per ounce on an up-to-the-moment basis. This is because the spot price of platinum is changing every few seconds as the precious metal is traded. Current platinum prices are typically measured in dollars per oz. Keep in mind that the platinum price per ounce is expressed in troy ounces, not standard avoirdupois (AVP) ounces that are used in almost all other situations.

Find out more about the spot price of platinum below!

Platinum Price Ask Change
per gram $23.62 +0.24
per oz $734.60 +7.46
per kilo $23,617.76 +239.84

24 Hour Chart

Historical Chart

How is the platinum spot price determined?

The price of platinum today is greatly influenced by the trade of platinum futures contracts. These contracts are taken to represent the future expectations for where platinum prices will move, as virtually all commodities are traded on the futures markets. The supply and demand for platinum also helps determine the price of platinum today. When supply goes down, possibly due to changes in the mining industry or more platinum getting used up in industry, this puts upward pressure on platinum prices.

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Understanding The Platinum Price

What is the spot price of platinum?

The spot price of platinum is a fluctuating price used as the fair market value for platinum bullion at any given moment. This is wholesale value for a unit of platinum without any added premiums. The spot price is the benchmark used by producers, mints, and dealers when pricing their platinum products.

Platinum spot price frequently asked questions

How is the spot price of platinum calculated?

The spot price of platinum is a reflection of the forces of supply and demand in the platinum market. It is influenced by both the aggregate level of demand for platinum (from automakers, jewelers, and investors) as well as the available supply of the metal. While various other factors can cause a shift in supply or demand, the trade of platinum contracts on the futures market is probably the largest single driver of the platinum spot price.

How often do platinum spot prices change?

Platinum spot prices are changing all the time. They respond to the trading of platinum on exchange markets, which goes on constantly when all the exchange platforms around the world are accounted for.

What can cause the spot price of platinum to change?

Supply and demand are the primary determinants of changes in the platinum spot price, and most other smaller variables will fall under the umbrella of these two factors. Supply-side variables such as new mining operations and cuts in production can influence the spot price down or up, respectively. Demand-side concerns such as collectors’ interest in platinum coins and consumers’ taste for platinum jewelry can also have an effect on the spot price. Yet, the largest driver of demand for platinum is its industrial uses, particularly in the catalytic converters of automobiles, so the manufacture of cars can also affect the spot price of platinum.

What currency is the spot price of platinum denominated in?

Platinum prices are denominated in U.S. dollars, just as most other commodities traded around the globe are. (This is due in no small measure to the status of the USD as the world’s reserve currency.) The use of dollars eliminates the transaction costs of converting unlike currencies, as just about every country in the world holds dollars in their Forex reserves.

What amount of platinum does the spot price refer to?

Per tradition, precious metal spot prices are always measured by the troy ounce, an archaic system of weights. One troy ounce is equal to 31.1 grams, slightly heavier than the standard avoirdupois ounce.

Is the spot price of platinum universal?

Yes, the platinum spot price applies wherever you are in the world. Because the spot price is subject to influences from all corners of the global economy, it makes sense that this benchmark price would be applicable in real time anywhere and everywhere you go.

Why can’t I buy platinum at the spot price?

The spot price of platinum is the price at which mining companies are able to sell newly mined platinum. This means that all costs borne by mints and dealers (i.e. the cost of minting coins or doing business online) must be factored in on top of the spot price. If dealers were to sell platinum and other precious metals at their respective spot price, they would be unable to earn a profit, and thus be forced out of business.

Does the spot price include markups or shipping costs?

No, markups and other added costs are not included in the platinum spot price. The spot price also does not include any costs related to the processing and fabrication of the platinum into its bullion form.

Why are some platinum products priced so much higher than others?

Pricing for platinum products can vary depending on what form the platinum comes in, and whether or not the item has any collectible appeal. Generic platinum products will be priced close to their melt value (the spot price), as they are generally only purchased for their underlying precious metal content. Meanwhile, legal tender platinum coins or special platinum collectibles will have higher premiums due to the added labor and specialization involved in their production, which is why the difference in price arises.

How are the premiums over spot calculated? Are they the same for all platinum products?

No, premiums over spot vary from item to item, and are based on factors that include, but are not limited to, the following: the cost of fabricating platinum into a bar or coin; the added labor costs for detailed art designs; producer-to-producer (or miner-to-refiner) shipping expenses; and any collectible or numismatic premiums for scarce collectibles. Some more generic items may only be a few dollars over spot, while other rarer platinum products could acquire premiums in excess of 100% of their intrinsic value.

What are bid and ask prices?

The bid price is how much a dealer is willing to pay for a specific item, while the ask price is the amount the dealer is selling the item for. These values are for sight unseen products, and do not account for rare or unique versions of a product. The “dealer spread” between the bid and ask prices for the same item is often used as an indicator of that product’s liquidity.

What are platinum future contracts?

Platinum futures are contracts between two parties who agree to exchange a specific quantity of platinum for a specific price; it is a “future contract” because the agreement will be settled on a future date, often three months in the future. Platinum futures trade at expected metal prices at a future date, so a high volume of futures swaps can help pull spot prices up or down.

What is the NYMEX?

The NYMEX is a commercial exchange platform where commodities futures contracts are exchanged. In 1994 the NYMEX acquired the COMEX, which facilitates trades in precious metals futures. In 2008, the NYMEX was acquired by the Chicago Mercantile Exchange (CME). The futures contracts traded on the New York Mercantile Exchange can have an indirect effect on the prices of all commodities, including platinum.

What is the COMEX?

The COMEX is the commodities exchange that is located in New York City. Platinum futures (and futures of many other commodities) are traded daily on the COMEX, and have a significant impact on the current spot price of platinum. The COMEX operates as the commodities division of the New York Mercantile Exchange (NYMEX), which acquired the COMEX in 1994. Both the NYMEX and the COMEX are operated under the Chicago Mercantile Exchange (CME).

What is paper platinum?

“Paper platinum” refers to shares of electronically traded funds (ETFs) that can be exchanged for physical platinum upon demand. Typically, shares of platinum exchange funds are used by investors who engage in high frequency trading, and businesses that engage in the sale of platinum. In most cases, shares of platinum ETFs are never actually redeemed for tangible platinum due to fees associated with delivery. Instead, shares of platinum ETFs are typically sold, traded, or rolled over.

Do mining companies have any effect on the price of platinum?

Mining companies can only sell their platinum, and other precious metals, at the market spot price for platinum. However, because mining companies incur such large overhead costs for research and development, if spot prices fall to low, mining companies may decide to scale back production, which can act as an upward pressure on the spot price of platinum.

Is platinum traded 24 hours a day?

Yes, due to the global presence of commodities exchanges all over the world (i.e Hong Kong, New York, London), precious metals are traded on a 24-hour basis. This ensures that spot prices for precious metals, like platinum, are constantly fluctuating.

Is physical platinum taxed?

Purchases of physical platinum may or may not be taxed based on several conditions. If the platinum products are being shipped out of the state in which the dealer is located (in our case, Florida), then their is no sales tax. Also, there is no sales taxes on platinum purchases over $500, since these purchase are viewed as investment purchases rather than consumption purchases. Finally, platinum coins that carry a legal tender status in the United States, such as 1 oz Platinum Eagles, are also exempt from all forms of sales tax within the United States. International purchases may be subject to any value added taxes or import duties imposed by the governing authority where they are shipped.

Why are there separate prices for bank wire and credit card transactions?

Because precious metals dealers typically operate on slim profit margins with high volume, it is necessary to offer separate pricing options in order to provide our consumers with the lowest possible premiums over spot. Credit card companies typically charge between 3-4% for processing transactions, while bank wires typically only involve a nominal flat fee from your bank. Because of this, we encourage all of our customers to use bank wire whenever possible so that you may maximize the amount of platinum you receive from your purchase.

If the spot price increases just before I make my online purchase, am I going to be charged a higher amount?

Spot prices, and thus the prices of our products, are constantly changing due to volatility in the precious metals markets. Prices on our products are re-calibrated nearly every minute, and at the time of transaction, in order to reflect the true price as determined by the free market. So if the spot price of platinum increases just before you make your purchase, then your purchase price will increase as well. However, if the spot price decreases just before you make your purchase, then your purchase price will also decrease. For transactions that involve the use of bank wired funds, if you provide a valid credit card that can be authorized for 5% of the transaction, the price may be locked in during the intermediate period between when you place the order and when the funds actually arrive in our account. Once the the funds are received from your bank, the credit card authorization will be voided. For more information on bank wire pricing, see our policy on bank wires.

Does the monetary denomination of a platinum coin affect its overall value?

What makes a coin a “coin” is that it must be legal tender for the redemption of debts. Simply having a legal tender status, which makes a round piece of platinum a coin, will typically increase the overall value of the platinum itself. The specific monetary denomination of a platinum coin is usually related to the size of the coin itself, i.e. 1 oz Platinum Eagles have a face value of $100 and 1/2 oz Platinum Eagles have a face value of $50. However, the amount of face value assigned to an investment-grade bullion coin typically has little bearing on the total value of a platinum coin, since the intrinsic value is usually much higher.

Is it better to buy platinum online?

Buying platinum online has several advantage to buying at traditional “brick and mortar” locations. Because online precious metals dealers are able to save on the typical overhead costs associated with operating local stores, they are often times able to pass those savings onto consumers such as yourself. Typically, online dealers also carry larger inventories, which affords them an economy of scale that allows them to pass additional savings onto consumers. Furthermore, purchasing platinum online also allows you to shop and purchase at your own convenience 24 hours a day, 7 days a week; unlike traditional local stores which are usually only open during normal business hours.

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