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Trader bets $13.5 million on gold rally

The flight to safety is on.

Gold prices hit a three-month high this week as investors seek shelter in the volatile market environment. The precious metal has climbed more than 5 percent since the start of the year, and according to one trader it could continue to rally through the rest of the first quarter.

On Tuesday, when gold gained more than 1 percent, one trader spent more than $13 million on a bet that the SPDR Gold ETF, the GLD, would rise to levels not seen since May 2015 in the next two months. Specifically, that trader purchased 75,000 of the March 108/117 call spreads for $1.80 each. Since each options contract accounts for 100 shares of stock, this is a $13.5 million bet that the GLD will rise more than 9 percent by March expiration. The GLD was trading at just under $107 a share on Wednesday.

Read MoreIt's time to protect your portfolio from volatility

"This was the largest options trade in the whole market [Tuesday]," RiskReversal.com founder Dan Nathan told CNBC's "Fast Money." "What I find interesting about the trade is that it's actually targeting a breakdown level from August and November," he said Tuesday.

Gold has been in a precipitous decline for the last three years, falling more than 32 percent during that period. "[The downtrend] has been so well-defined and has made a series of lower highs and lower lows," Nathan said. "There will be a bunch of countertrend rallies but I expect gold to fail at that downtrend which is actually just below the high end of the call spread."


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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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