Skip to main content

Taking Advantage of the Panicked Selling in Gold

A poor PPI reading, retail sale, and consumer confidence number appear to have finally brought some sellers into the equity markets this morning. But the real looser this morning is not a stock, its gold. Gold is currently down nearly 4% and has blown through support at its 2012 lows. Early option trading is heavy, with 1.7 puts trading for every call. Demand for out of the money puts has pushed the gold volatility index up 25%, which demonstrates the level of fear in this market right now.

One of the biggest trades this morning on the GLD appears to be the purchase of 3925 May 150 puts for $3.70 and the sale of 3925 March 2014 144 puts for $6.90. This trade is an expression of a short term bearish and long term bullish view. The May 150 put that was bought will be profitable if GLD is below 146.30 at May expiration. To finance the cost of buying this put and expensive volatility this trader then sold a long term 144 put for 6.90. This trade will be profitable if GLD is above 137.10 at March expiration next year. If GLD is not above there the trader will be put to a long position in gold for an effective price of 137.10.

This trade takes advantage of today’s panic selling in two ways. First, it gives the trader short exposure to GLD for the next month which will pay off if today’s momentum continues. Second, it sells the high volatility in the March options which will get the trader long at a level they consider a good buy point for a long term position.

Similar to this trader we are long term bulls but defensive in the near term. Gold broke through a major support level but is likely to stabilize around 145, which will cover its gap left from mid-2011. Around these levels we are willing to get short volatility by selling longer dated puts at a strike we would be willing to get long 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 ...