Gold Options Showing Major Price Swings Coming (GLD)

Posted in General, Options 
January 8th, 2011

The five straight days of lower prices in the SPDR Gold Shares (NYSE: GLD) comes with an interesting twist.  This week we saw elevated options trading when you consider that only one single day of the last week was above its average daily volume.  A fight appears to be more than just starting to brew.

On Friday, in the JAN11 CALLS there were nearly 45,000 combined Call option contracts versus close to 36,000 of the combined put options traded.

JAN12 $115.00 CALLS closed at $23,30 but there were 10,007 contracts traded on Friday versus a prior open interest of only 17,569 contracts.  Likely many were closed out, but we’ll know Monday.  In the JAN12 $130.00 PUTS after a $10.05 close we saw 7,110 contracts trade versus an open interest of 20,656 contracts.  Even out in the JAN13 CALLS there were a combined number of nearly 5,000 contracts which traded in the out of the money CALL strikes.

To show how crowded the gold trade is now, the $135 JAN13 CALL is the closest strike price.  Its last trade was $19.41 on Friday.  That implies that the GLD has to rise another $20.00 per share and that gold has to rise to close to $200 more per ounce by the third Friday in January of 2013 for that to break-even.

Our technical analysis affiliate is Adam Hewison of INO and he has spot gold looking oversold with $1,362 an ounce as the next support to watch.  We’d also note that S&P gave a $1,600.00 per ounce target by the end of 2011.
The other big call on energy and materials was where S&P surmised that gold would finish 2011 around the $1,600.00.  If that holds true, then $158 to $159 is what you’d expect on SPDR Gold Shares (NYSE: GLD).

Watch gold.  The GLD is not showing the active trading when you consider how much gold has pulled back.  The GDL fell to $133.58 after having closed out 2010 just a week ago at $138.72.  That is a drop of about 3.7%.  For whatever it is worth, the GLD also broke through the 50-day moving average and stayed there for the first time in months.

What is being set up will sound greatly simplified.  Unfortunately that is the way things are sometimes.  Gold is going to try to test much lower levels or we are about to see an explosive move higher.

JON C. OGG

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