Taking Advantage of the Gold Panic: Stutland

Source: World Gold Council

Poor Producer Price Index reading, retail sales, and consumer confidence numbers appear to have finally brought some sellers into the equity markets Friday morning. But the real loser is not stocks, but gold.

Gold was down 4 percent as of this morning, and has blown through support at its 2012 lows. Early option trading is heavy, with 1.7 puts trading for every call. Demand for out-of-the-money puts has pushed the gold volatility index up 25 percent, which demonstrates the level of fear in this market right now.

(Read More: Gold Plunges, Lowest Since 2011)

One of the biggest trades Friday morning on the gold ETF, SPDR Gold Trust (GLD), appears to be the purchase of 3925 May 150-strike puts for $3.70, and the sale of 3925 March 2014 144-strike puts for $6.90. This trade is an expression of a short-term bearish and long-term bullish view. The May 150-strike put that was bought will be profitable if GLD is below 146.30 at May expiration, and by which by the late morning it has become a big winner already.

To finance the cost of buying this put when options were so expensive, this trader then sold a long-term 144 put for $6.90. This trade will be profitable if GLD is above $137.10 in March 2014. If GLD is not above there, then the trader will be put to a long position in gold for an effective price of $137.10.

This trade takes advantage of Friday's panic selling in two ways. First, it gives the trader short exposure to GLD for the next month, which will pay off if today's momentum continues. Second, it sells the high volatility in the March 2014 options, which will get the trader long at a level that the trader thinks is an attractive entry point for a long-term position.

(Read More: Cyprus to Liquidate Most of Its Gold Reserves)

We have a similar outlook to this trader, in that we long-term bulls, but are defensive in the near term. The gold ETF broke through a major support level, but is likely to stabilize around $145, which will cover its gap left from mid-2011.

Around these levels, we are willing to get short volatility by selling longer-dated puts at a strike price where we would be willing to get long gold.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

Disclosures: Stutland holds a long GLD position, which he hedges through put spreads and short calls.

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