Posted on 03/03/2020 4:43:34 PM PST by nickcarraway
Gold is off to a strong start in 2020 as investors flock to safe haven trades amid coronavirus fears. The precious metal is up nearly 8% this year, and has surged 26% over the last 12 months.
One options trader is betting the rally is far from over, and after Tuesday’s surprise 50 basis point rate cut from the Federal Reserve, it’s already looking like a smart wager.
This trader wasn’t alone in their bullish betting on gold futures, but their trade was, by far, Monday’s largest trade in gold futures, according to Michael Khouw, president of Optimize Advisors.
“Most of that activity was concentrated in the June 1,725-calls, and that included a purchase of nearly 1,200 of those calls. The buyer spent $17.20 in premium for those. That’s a bet of approximately $2 million in premium that [gold] will rally above that $1,725 strike price — that would represent an increase of about 9% in the metal — by June expiration,” Khouw said Monday on “Fast Money.”
For this trade to be profitable, gold prices would have to rise above $1,742.20 by May 26, which is when June gold futures contracts expire. That would represent a 9% move higher from Monday’s close, and would see the commodity hit its highest levels since November 2012.
Khouw also pointed out that overall bullish activity outpaced bearish activity in options trading in gold futures on Monday by about 2-to-1, which is just about in line with activity seen in the commodity over the last 20 trading days.
Gold futures were about 3% higher in Tuesday’s session.
With real (inflation adjusted) bond yields firmly in negative territory across the yield curve, gold is looking attractive. It has no yield but as a store of value, and being impervious to the depredations of central bankers, it is far more likely to hold its value over the long run. The bond market has departed from the plane of reality that I inhabit.
And even moreso since Ft Knox has no gold
“For this trade to be profitable, gold prices would have to rise above $1,742.20 by May 26,”
CNBC writer should know better!
I hope he’s right since I’m sitting on some gold options of my own.
A one day or week spike short of the break even price will spike these options up.
I rarely hold calls I purchase until expiration.
You own a $6 call on a stock that is 5, if it moves to 5.50 the next day, that $6 call will spike up and you dump at least to break even.
The rest is gravy.
Between the rate cut, a possible payroll tax cut and disrupted supply chains, we are likely going to have a case of too much money chasing too few goods - inflation. That should be good for gold.
“...inflation. That should be good for gold.”
I’ve been sitting on gold for 15 years now, since Dad & I invested some inheritance cash. Mama Like! :)
P.S. Diversity is your friend, of course! Stocks, Bonds, a paid-for home and LAND, ammo, sturdy boots, dry & comfy socks, canned goods and a can opener. ;)
Silver also works.
I first read this and thought it said “Opium trader bets on gold.”
Absolutely correct. I have hundreds of can openers; I can trade them for canned goods if TSHTF. My father-in-law owned a liquor store, and my wife got over 1000 can openers when he passed on. She gave away half of them. Don't know why he had so many, he got them free while selling beer. Also got lots of whiskey, which is as nice as having gold.
Agree on the whiskey. Good for trading and treating wounds. ;)
Stories like this are useless. You don’t know what other positions the trader has on. Long or short the actual metal, other-dared contracts, or just hedges with something that historically trades the other way. Useless noise.
I don’t listen to anybody, LOL! :)
Im buying short dated SPY puts. Paying for all that premium is a loser. Short dated stuff has tiny premiums, just keep rolling them out to the next week. Option underlying stocks or GLD goes down alot faster than it goes up. I missed the first big dump week, but Im lovin life since
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