Big Printin’ – $GDX, $GLD: Ain’t Messing With A Gold Digger

by Dan February 11, 2016 3:52 pm • Commentary

Earlier today on CNBC’s Halftime Report, Billionaire Dallas Mavericks owner Mark Cuban stated like most others he is confused by what is going on in the financial markets, but recently thought there was an opportunity to profit from a rise in Gold, expressing that view in what were out of the money calls, that are now in the money, simply a momentum trade, not fundamental, not as a hedge, watch here:

Call activity in GLD exploded today, at nearly 4x that of puts, with total GLD options volume nearly 4x average daily, on a day the shiny metal is up more than 4%, making a new one year high. GLD has rallied nearly 20% from its mid December 6 year low, which in hindsight was massive technical support:

GLD 10 yr chart from Bloomberg
GLD 10 yr chart from Bloomberg

I would note that the etf failed at what looks to be technical resistance at $120:

GLD 5 year chart from Bloomberg
GLD 5 year chart from Bloomberg

There was a bullish roll that caught my eye shortly after the open, not because of the premium commitment, or contract size, but because the trader rolled a well out of the money call that they were long to a WAY out of the money call.

When the etf was $118.50 a trader sold to close 20,000 GLD March 133 calls at 56 cents ($1.12 million in premium) and bought to open 20,000 GLD March 140 calls for 29 cents ($580,000 in premium) which break-even up at $140.29 on March expiration up 18% from the trading levels.

This sort of activity does not speak to massive commitment, it more resembles the rolling out of a lotto ticket.  The March 140 calls have a 6 delta, which basically means that options traders see only a 6% chance those calls are in the money on March expiration.

And in the Miners…

There was an interesting bullish trade in the GDX, the Gold Miner etf that’s very different than the the bullish trade just detailed in the GLD. This trader seems to be more cognizant of the recent run in the underlying and wants to position of the potential of a continuation, but wants to help finance that bullish view.

Today when the GDX was $18.50, a trader bought to open 15,000 of the September 14.50 / 20 risk reversal paying $1.27.  The trader sold 15,000 of the Sept 14.50 puts and bought to open 15,000 of the Sept 20 calls.

On the upside this trade breaks-even at $21.27 on Sept expiration, up 15% from current levels, and on the downside at $15.77, down about 15% from current levels. Mark to market this trade will have gains as the etf trades higher towards the long call strike, and losses as the etf trades lower towards the short put strike. The worst case scenario is that the etf is below the 14.50 put strike on Sept expiration, and the trader is put 1.5 million shares of GDX, but also loses the $1.27, or $1.9 million in premium paid for the risk reversal and loses one for one below $14.50.