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Options trader bets $2 million on a monster rally for gold

Monday's rally as good as gold, options trader bets

Gold is off to a strong start in 2020 as investors flock to safe haven trades amid coronavirus fears. The precious metal is up nearly 8% this year, and has surged 26% over the last 12 months.

One options trader is betting the rally is far from over, and after Tuesday's surprise 50 basis point rate cut from the Federal Reserve, it's already looking like a smart wager.

This trader wasn't alone in their bullish betting on gold futures, but their trade was, by far, Monday's largest trade in gold futures, according to Michael Khouw, president of Optimize Advisors.

"Most of that activity was concentrated in the June 1,725-calls, and that included a purchase of nearly 1,200 of those calls. The buyer spent $17.20 in premium for those. That's a bet of approximately $2 million in premium that [gold] will rally above that $1,725 strike price — that would represent an increase of about 9% in the metal — by June expiration," Khouw said Monday on "Fast Money."

For this trade to be profitable, gold prices would have to rise above $1,742.20 by May 26, which is when June gold futures contracts expire. That would represent a 9% move higher from Monday's close, and would see the commodity hit its highest levels since November 2012. 

Khouw also pointed out that overall bullish activity outpaced bearish activity in options trading in gold futures on Monday by about 2-to-1, which is just about in line with activity seen in the commodity over the last 20 trading days. 

Gold futures were about 3% higher in Tuesday's session.