Options trader bets millions on speedy gold spike

Options trader bets on gold
Options trader bets on gold   

The greenback's retreat has sent money piling into gold. Now one trader is making a massive bet that bullion will rally more in the next couple of months.

Since testing 12-year highs back on March 13, the U.S. dollar index has fallen 3 percent. In that same time frame, gold has gained almost 5 percent. After disappointing gold bugs for much of the first quarter of 2015, the yellow metal is now 2 percent up for the year.

A trade in options on the SPDR ETF tracking gold (trading with the ticker symbol GLD) indicates some expect gold's rally to continue. Specifically, a trader purchased 50,000 contracts of the 120-strike calls expiring in June for $1.18 each. As each contract controls 100 shares, the trader is wagering $5.9 million that the GLD will close above $121.18, or at least 4 percent higher from Tuesday's close by mid-June. A call is a bullish bet giving purchasers the right to buy shares at a set price within a given time.

According to Stacey Gilbert, head of derivative strategy at Susquehanna, the trader is clearly looking for a quick spike in gold prices.

"This strategy is this is not a 'slow drift higher' type of strategy," she said. "If GLD were to just drift higher, these options are going to decay away and they are not worth nearly as much. This is a strategy that you would typically use if you were protecting a short position—you are afraid of a huge pop to the upside—or you're trying to look bullish and again looking for that pop to the upside."

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Gilbert notes that this one trade's size was about equal to the average daily volume for all options in the the GLD.

"The flow today is suggestive that if we move higher, it could definitely be an explosion more to the upside rather than a slow drift," Gilbert added.

But such a move may not happen any time soon, according to Kathy Lien, director of FX strategy with BK Asset Management.

"In order for that to happen, we need extreme dovishness from the Federal Reserve," said Lien. "I'm not too sure we can get that after the FOMC meeting. I think at the bare minimum, we may get just a little bit of uneasiness about recent data. But I don't think it's enough to turn that bullish [on] gold."

The Federal Reserve is set to release their next policy statement on Wednesday afternoon, potentially giving gold and dollar watchers the next trading catalyst.

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