Skip to main content

Bullish Options Activity in GLD

Today one option trader is taking advantage of gold’s decline by buying upside calls. The biggest trade of the day is the purchase of 7,250 GLD January 2014 calls for $4.35. This is a bullish trade that profits if GLD is above 204.35 at January 2014 expiration, which is 415 days away and a 23% move higher. The 200 level in GLD corresponds to a spot gold price of about $2100/oz.

Gold fundamentals remain strong going into 2013, and while I don’t expect gold to trade to $2,100/oz in the coming year, I do expect gold to appreciate significantly. This is based on simple supply and demand. The supply side of gold is not expected to increase dramatically next year, but demand should continue to grow. The two primary sources of gold demand are central banks and exchange traded funds. In 2011 net central bank purchases exceeded 455 tonnes, the largest since 1964. This year the World Gold Council has reported that net central bank purchases are about 20% of global supply. Meanwhile, demand for gold from investors has also been strong, which has led to over $200 million in inflows to GLD this month alone.

I trade gold based on a fundamental macroeconomic model, which currently suggests gold’s fair value is $1785. I am closely watching the Fed’s activity and how it affecting the US monetary base, as well as movements of the Euro, bonds, and the unemployment rate. While we are certainly bullish on gold, our model suggests that $2,100 is not a realistic target given current fundamentals. Therefore I would not hold this option to expiration, but the 200 call is likely to appreciate in price in the near term on a pop in gold.

Comments

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...

The Week in Review

One of the questions I get most from clients is how to generate yield when the Fed is on hold with rates at zero. For a while many defensive clients were content receiving their 3% annual yield from Treasury bonds, but the Fed’s most recent meeting minutes shows that the Fed’s pace of bond buying may soon slow. While I do not think tapering is likely before year end (unless economic data accelerates significantly) the bond market is forward looking and already beginning to price tapering in. Smaller Fed purchases of Treasury bonds will mean that bond yields go up and bond prices go down. Bonds have been in a multi-year bull market, and we may now be on the cusp of a multi-year bear market. The most important indicator to watch is the 10-year yield, which cracked the 2.10% level this week for the first time in a year. If we continue to hold above 2.05% in June, the top is likely in for bonds and borrowing rates will be on the rise for everyone, including the US Treasury. So, how am ...