Good Example of Bullish Option Spread Trade in Gold

05/17/2010 10:51 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Gold has been quite a hot commodity recently, with investors bidding the malleable metal to fresh multi-year highs in two of the prior three sessions. While gold futures have pulled back from earlier highs, the precious metal is still holding firm above short-term support in the $1,220 area. What's more, at least one options trader is looking for gold prices to rally sharply through the fall.

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Options traffic on the SPDR Gold Trust (GLD) exchange traded fund (ETF) has been brisk, with call volume nearly quadrupling the ETF's daily average, and put volume all but tripling the norm. Call trading has been the most interesting activity by far, as several gold bugs have jumped into bullish debit spreads on the ETF. For instance, one trader bought 2,622 September 145 calls for the ask price of $1.35, while simultaneously selling 2,622 September 155 calls for the bid price of $0.73.

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The result of this spread is a net debit of $0.62, with the trader needing GLD to rally more than 20% to $145.62 per share (placing gold futures somewhere above $1,450 an ounce!).

By Joseph Hargett of Schaeffer’s Trading Floor Blog

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