The buyer of a palladium option contract is conferred the right (but not the obligation) to buy or sell a specific amount of palladium at a fixed price (strike price) to be delivered on a designated date. This right can be exercised anytime before the option expires but the option buyer can opt not to exercise the option should the price of palladium move against him.
The advantage of buying palladium options is similar to that of palladium futures in that they both provide significant financial leverage. However, unlike a palladium futures contract, the palladium options contract holder do not have the obligation to buy or sell the underlying palladium. Hence, the palladium option buyer's downside risk is strictly limited to the cost of the option - i.e. the premium plus any transaction costs.
The disadvantage of palladium options is that they can expire worthless if price of palladium does not appreciate beyond the strike price within the lifetime of the option.
Another useful aspect of investing in palladium options is that, unlike more traditional palladium investments such as palladium coins or palladium stocks which only gain in value when the price of palladium goes up, it is possible to profit from a drop in palladium price when trading palladium options. One can purchase palladium put options, which gain in value as palladium price falls. Buying palladium put options allow the astute palladium investor to bet against palladium price. An investor with a sizable stash of palladium bars or palladium coins can also protect the value of his holdings against falling palladium price by purchasing some palladium put options.
For the novice investor, options trading can be a rather complicated subject. You can learn more about trading palladium option contracts at The Options Guide.
How to Start Trading Palladium Options
To buy or sell palladium options, you need to open a trading account with a broker that handles palladium futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.