GLD Options Traders Bet on More Upside After North Korea Boost – Schaeffers Research (blog)

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Gold futures had their best day since May 17 today, as rising tensions between the U.S. and North Korea increased traders’ appetite for safe-have assets. As such, the SPDR Gold Trust (GLD) is 1% higher at $121.11 — and could take back the $121 level, which coincides with a 61.8% Fibonacci retracement of the fund’s early 2014 to late-2015 slide, and capped last week’s rally attempt. GLD call options are in high demand, too, with 127,067 contracts traded — 2.6 times the expected intraday amount, and volume is on track to settle in the 92nd annual percentile.

Most active is GLD’s October 131 call, due to two blocks totaling 22,935 that changed hands within one minute of each other this morning, with Trade-Alert indicating new positions were purchased. If this was at the hands of one trader, they paid $825,660 (number of contracts * $0.36 net debit * 100 shares per contract) to bet on a breakout above $131 by October options expiration. 

This trend toward long calls isn’t anything new in the exchange-traded fund’s (ETF) options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 375,794 calls in the past 10 weeks, compared to 210,447 puts. The resultant 50-day call/put volume ratio of 1.85 ranks in the 70th annual percentile, pointing to an unusual bias for bullish bets over bearish.

And while a number of LEAPS strikes make up GLD’s top four open interest positions, the nearer-term September 132 call comes in fifth place, with 53,067 contracts outstanding. Data from the major options exchanges confirms significant buy to open activity here in late May — when the fund was trading around $119 — indicating options traders expect a move north of $132 by expiration at the close on Friday, Sept. 15, days before the September Fed meeting.

It’s certainly possible that some of the recent call buying on GLD, particularly at the out-of-the-money strikes, is a result of short sellers hedging their bearish gold bets against any upside risk. However, just 7.88 million shares are sold short on the gold fund — the fewest since early March, and down almost 25% in the two most recent reporting periods.

Plus, expectations for gold seem to be on the rise, according to the weekly Commitments of Traders (CoT)  report. Specifically, the latest data showed large speculators increased their long positions on gold for a third straight week, following a sharp decline from the June 6 peak.

Regardless of the reason, now appears to be an attractive time to buy premium on short-term GLD options. While the fund’s 30-day at-the-money implied volatility of 10.5% ranks in the 16th annual percentile, its Schaeffer’s Volatility Index (SVI) of 10% ranks lower than 92% of all comparable readings taken in the past year. In other words, low volatility expectations are being priced into GLD’s near-term options.