Is Gold Getting Ready to Bounce?

Includes: GDX, GLD
by: Frederic Ruffy

Some players in the options market are showing surprising amounts of bullish sentiment towards gold, even as the yellow metal displays considerable downside momentum. Thursday, the yellow metal lost $5.00 and moved back towards $800.00 an ounce. Gold is now down 4.2 percent during the first three trading days of September and off 19 percent since July 15. Yet, despite the ongoing woes, not everyone seems to hold a bearish view on the precious. In fact, some options strategists were seen betting on a turnaround with substantial bullish spreads on the SPDR Gold Trust (NYSEARCA:GLD) and the Market Vectors Gold Fund (NYSEARCA:GDX) Thursday.

The SPDR Gold Trust saw bullish trading. The exchange-traded fund, which holds actual bullion stored in bank vaults, fell 50 cents to $78.39 a share. Like gold itself, GLD is down more than 19 percent since mid-July. Now, however, some seem to be positioning for a rebound with bullish spreads on the ETF.

Shortly after 11:00 Eastern time Thursday, an order for 15,000 of the GLD December 80 calls traded on the offer or for $4.17 a contract on the ISE. At the same time, 15,000 of the December 94 calls traded bidside for 92 cents. With the GLD sitting near $78.00, the trading activity has all of the characteristics of a bullish call spread. If so, the strategist in question is positioning for a rebound and willing to pay a debit of $3.25 to enter the spread. The upside breakeven (at expiration) is consequently $83.25 with a profit potential of $10.75 (per spread) should GLD rally back up to $94.00 a share by December options expiration, which would equate to roughly $940 an ounce for the precious metal itself.

Figure 1: GLD Bull Call Spread

The Market Vectors Gold ETF saw similar bullish trading. Rather than holding the precious metal itself, GDX holds shares of Newmont (NYSE:NEM), Barrick Gold (NYSE:ABX) and 29 other mining companies. It tends to move in a fashion similar to the price of gold, but not exactly. For example, Thursday, GDX slid $1.39 to $32.18 a share and to its lowest levels since June 2006. The fund suffered a 37.9 percent swoon since July 15.

Yet, despite the ongoing slide in the Market Vectors Gold fund, some bullish traders surfaced Thursday. Again the focus was on the December contracts. In this case, with GDX trading for $32.40 at 15:45, a block of 8,156 December 33 calls traded offerside for $3.35 and 8,173 of the 43s traded on the bid for 70 cents. The trade was repeated several times until volume in both contracts topped 20,000 contracts. Again, the strategy appears to be bullish spread trading, where the investor in question is buying calls with the lower strike price and selling calls with a higher strike. In this case, the strategist might be willing to pay $2.65 per spread and has a potential payoff of $7.35 should the Market Vectors Gold fund rally to $43 a share or greater by December options expiration (106 days).  

Figure 2: GDX Bull Call Spread

Stock position: None.