Gold option bets point to $1,200 early next year
NEW YORK, Nov 20 (Reuters) - Option traders are betting
that gold will hit $1,200 an ounce or higher by early next
year, and strong options interest could in turn lift underlying
prices further into the uncharted territory.
Buying of calls, which confer the right but not the
obligation to buy an instrument at a preset strike price, has
been a strategy to gain exposure as gold prospered as a hedge
against depreciating paper currencies during the nascent
economic recovery.
"There are funds that are positioning themselves to be long
here," said COMEX gold options trader Jonathan Jossen.
Jossen said that investors have been snapping up February
$1,300 calls, April $1,400 calls and June $1,500 calls for
2010.
Bullion is up 30 percent from the 2008 year-end close of
$878.20.
Bullion reached a record high of $1,152.75 on Wednesday,
more than quadruple the price of $250 an ounce in 2001.
Option traders also reported heavy buying of bull call
spreads -- bets that prices will rise -- between $1,200 and
$1,250 this week.
A bull call spread involves buying a lower strike-price
call and selling a higher strike-price call. Profits are
maximized when prices rise above the higher strike price.
WORTHLESS DECEMBER $1,200 CALLS
Since gold's bull run a year ago, investors have been
piling into the affordable long-dated out-of-the-money calls.
An option is out of the money when the exercise price of a call
exceeds the current price of the underlying gold contract.
One popular call is the COMEX December $1,200, with more
than 28,000 lots current open interest. If exercised, these
options could turn into new buying equivalent to almost 3
million ounces of gold valued at $3.2 billion.
Gold at $1,200 seemed like a long shot only until
September, when prices began an ascent to all-time highs on the
back of renewed central bank interest, buying by prominent
hedge fund managers including John Paulson, and signs of
simmering inflation.
"Everybody just feels that it's going to take off and shoot
straight up to above $1,200," Dominick Cognata, a COMEX gold
options trader.
However, with only one more trading day to go, the
out-of-the money December $1,200 calls are set to expire
worthless on Monday. December gold futures GCZ9 were trading
at under $1,150 an ounce on Friday.
Dealers said option investors are now focusing on February
2010 $1,200 calls, which has almost 15,000 lots open interest.
April and June calls have each attracted nearly 10,000 lots.
When heavy interest lines up at a particular strike price,
it can indicate where the underlying market is headed, or at
least where options traders think it is.
The hedging by options desks to make sure they can sell or
buy an instrument if the option is exercised can force the
underlying market in the direction of the strike, especially as
it nears expiration.
"No level for gold feels like it is a particular barrier.
$1,200 an ounce can prove to be a magnet simply because there
are so much open interest in these $1,200 December calls," said
Jon Spall, director at commodities hedge fund sales for
London-based Barclays Capital.
Free Information
Learning Center
Secure Your Retirement
Gold Resources & Media
Buy Gold Now
 | ||||||
|
Social Bookmarks
