Knowing Your Options on Gold

Investors are taking advantage of new highs in gold prices by taking profits in gold options.

Gold bars
Tom Grill | Iconica | Getty Images
Gold bars

On the COMEX, “volume has picked up as we are on contract highs”, says independent trader Steve Seel. “Customers are taking profits short term and rolling their longs out to December.”

Investors are doing this by selling out of their long in the money call positions and buying less expensive out of the money calls. Basically, “…taking some money off the table,” says Seel.

The biggest gold ETF, SPDR Gold Shares saw a spike in options volume and a decline in the volume of its underlying shares. As of 2:15pm ET today, “GLD calls had a volume spike of 160 percent” above the 1-month average daily volume, says Scott Weiner, Deutsche Bank U.S. Head of Equity Derivatives and Quantitative Strategy.

“On the put side, volume is 118 percent above the 1-month average daily volume”, while “GLD volume is actually down 63 percent relative to its 1-month average daily volume,” Weiner says.

Compare that to last week, on May 6, Scott says, when, “you had a lot of activity in both options and the cash market relative to history.” That day saw the highest volume in calls and GLD contracts for all of 2010 trading up over 340 percent of its 1-month average daily volume.

Option action was not limited to ETFs and futures. Single stock options saw a pickup in volume as well. “Investors can benefit if you buy the options” with downside limited to the option premium, says Bill Lefkowitz, options strategist at vFinance Investments.

Lefkowitz singled out activity in call options on both Yamana Gold and Newmont Mining . “Newmont $60 calls have been active” trading around $0.80 and expiring next Friday. “The most you can lose is what you put in”, he added.

Options can be a “cheap way to take a shot on the upside”, but Mr. Lefkowitz also cautions, “these stocks have all moved up, some investors are saying they are due for a pullback.”