FMX | Connect (Reported 4/21/2011)
The following is a report of Gold Option’s activity in the Over-The- Counter and Exchange traded venues. Information is compiled and summarized below.
Summary
June Gold settled at $1503.80 per troy ounce, a gain of $4.90 for the day. Gold continued to trend higher ahead of a long, holiday weekend.
Commentary & Analysis:
Today’s futures activity was a repeat of yesterday’s. The options activity also mirrored yesterday but at a lower volume of interest. In this article, we’d like to lay out what we think will happen to gold over the next 6 days. Before we do let’s discuss the futures activity. Today, as in the last 4 or 5 days, the market was very orderly. It traded new all-time highs overnight. While futures came in higher on the comex, they traded in a tight range, approaching but never piercing the overnight high. The range has consistently been between 1495 and 1507. Every day it moves up a couple dollars. Today it was 1500-1510, with most of the day spent between 1501-1507. We’ve seen this behavior before. When you combine this activity with a big holiday weekend and a specific type of options open interest you have a setup for a $20 move higher.
There were 6800 lots of open interest in the May 1500 call going into today and interest has remained at that level for some time. Market making firms and locals are long, while banks are playing from the short side. Banks have the deeper pockets and one might assume that the strike will be pinned if he is a student of history. And so here we are, hovering around the strike, ripe for a pin.
Enter the May 1520 call buyer. Over the last 3 days large volumes of the 1520 call have been purchased. with approximately 6400 contracts trading on Tuesday alone, almost all of them purchased near the days’ lows. These are not impulsive buys; on the contrary, they seem well thought out. We believe the long is strong and once the May 1500 gravity is broken, as is happening slowly, a nice pop in the market will occur. Finally, take note of the market’s opening schedule reposted here:
April 21st, Holy Thursday: day before a holiday
April 22nd: Good Friday: CME Closed
April 23rd,Easter Saturday: Markets Closed
April 24th,Easter Sunday: Markets Closed
April 25th, Easter Monday: LME Closed (Largest Physical Bullion Exchange Worldwide)
April 26th, Tuesday: May Options Expiration CME
While everyone we speak with is worried about the 1500 strike being pinned we think the 1520 is more significant. If we go to the 1520 strike money will change hands in a spectacular fashion, whether we pin it, progress through, or fail.
As for the other months, August calls were bid, specifically the 1600 strike. This was a different type of buyer from the 1700 call buyer yesterday but both were bullish. June calls were also bid but found sellers in the futures selloff and never quite recovered. August, however, remained firm. June at-the-money options were lower from two types of sellers, retail liquidating 1500 calls for a profit and speculative bulls selling naked puts the 1500-1480 area. As stated many times before, if this market continues to bid call skew than puts will have to give up, and we are finally starting to see that in the December 1300-1200 area. There were sellers of the December 1200 put in outright and spread form today. If this continues we will have seen the continuation of the skew transformation. Finally, December 1700 and 1800 calls are untouchable.
Happy Holidays, There Will Be No Report Tomorrow. Don’t Miss Our Special Pin Risk Report for Gold and Silver on Monday.
Active Options
K 1500 P
K 1520 C
M 1550 C
Q 1600 C
Z 1200 P
ATM Volatility Curve:
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| K11 | 1505 | 13 | 17 |
| M11 | 1505 | 47 | 51 |
| Q11 | 1505 | 93 | 97 |
| V11 | 1505 | 132 | 136 |
| Z11 | 1505 | 163 | 167 |
| G12 | 1510 | 199 | 203 |
| J12 | 1510 | 230 | 234 |
| M12 | 1515 | 251 | 255 |
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