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Trader bets millions on quick gold rally

Gold has fallen steadily in the past two weeks, but some traders are making large bets the metal will see sizable gains in the weeks ahead.

On Thursday, when options volume in the ETF that tracks gold (trading under the symbol GLD) was 3.5 times its daily average, one trader bought 100,000 June GLD 117.5-strike calls for 38 cents each.

As each contract controls 100 shares, the trader is betting $3.8 million that the GLD will trade above $117.88 or 3 percent higher in the next three weeks. The trader originally had a similar-size position in the June 120-strike calls. But those were sold for 13 cents each, and the $1.3 million in proceeds were used to pay for the 117.5-strike calls.

A call is a bullish bet giving the purchaser the right to buy a stock at a set price within a specific timeframe.

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According to Dan Nathan, co-founder of RiskReversal.com, at first blush this trade may not be the easiest bet to make.

"I'm just not exactly certain, if you're really bullish on gold, that buying out-of-the-money calls—that basically break even 3.5 percent out of the money—is the way to do it," he said.

However, the GLD's implied volatility—essentially, the price of the options—has fallen to 12.9 from a high of 22.1 made six months ago.

"They are reaching the lows of the year and almost at 52-week lows," said Nathan about the GLD's implied volatility. "Options premium is a treat for directional players."

Despite seeing a 10 percent rally in early January, gold has nearly given back all of those gains. It is now close to flat for the year while the U.S. dollar index is up 7 percent.

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