Taking Advantage of the Panicked Selling in Gold

A poor PPI reading, retail sale, and consumer confidence number appear to have finally brought some sellers into the equity markets this morning. But the real looser this morning is not a stock, its gold. Gold is currently down nearly 4% and has blown through support at its 2012 lows. Early option trading is heavy, with 1.7 puts trading for every call. Demand for out of the money puts has pushed the gold volatility index up 25%, which demonstrates the level of fear in this market right now.

One of the biggest trades this morning on the GLD appears to be the purchase of 3925 May 150 puts for $3.70 and the sale of 3925 March 2014 144 puts for $6.90. This trade is an expression of a short term bearish and long term bullish view. The May 150 put that was bought will be profitable if GLD is below 146.30 at May expiration. To finance the cost of buying this put and expensive volatility this trader then sold a long term 144 put for 6.90. This trade will be profitable if GLD is above 137.10 at March expiration next year. If GLD is not above there the trader will be put to a long position in gold for an effective price of 137.10.

This trade takes advantage of today’s panic selling in two ways. First, it gives the trader short exposure to GLD for the next month which will pay off if today’s momentum continues. Second, it sells the high volatility in the March options which will get the trader long at a level they consider a good buy point for a long term position.

Similar to this trader we are long term bulls but defensive in the near term. Gold broke through a major support level but is likely to stabilize around 145, which will cover its gap left from mid-2011. Around these levels we are willing to get short volatility by selling longer dated puts at a strike we would be willing to get long gold.