Who Has the Golden Touch? (One unknown buyer has accumulated 50,000 gold call option contracts)

The Street ^ | 05/25/2011 | Doug Kass

[SeekAndFind]

Over the course of the past few months, one large buyer has accumulated approximately 50,000 gold call option contracts -- most of the calls are strikes between $1,600 and $1,800 an ounce and for expirations between August and December. In total, as much as $50 million in call premium has been paid out by the purchaser.

As the gold futures market is roughly 10x to 15x the size of the gold options market, this is a huge bet in absolute dollars relative to the liquidity of the market.

Considering that the calls are well out-of-the-money (gold, on a futures basis, today trades at $1,512), the call option is all premium and, as such, is a decaying asset. So, given the size of the purchase, the buyer is not likely an individual hedge fund -- more likely, it is a central bank or a sovereign fund.

It is interesting to note that all of the buyer's options mature after QE2, so the buyer might believe, for example, that the institution of QE3 holds a greater probability to be implemented than the consensus is currently forecasting.

The buyer is clearly betting on a large run-up in the price of gold during the summer and fall months. With all this leverage in the hands of one owner, a sharp price appreciation in the price of gold could cause the shorts (on the other side of the call option trade) to continuously buy futures and further contribute to a rising gold price in order to maintain a flat delta.

[DAC21]

Spooky Dude?

[Perdogg]

was it this man?

[null and void]

That would be my guess.

[dfwgator]

[agere_contra]

Unless spending is immediately cut by a significant fraction, like a third, there is no alternative to QE3. Without spending cuts the dollar is simply too unattractive to investors.

So this sounds like 50 million well spent.

[Fido969]

Or someone is going to get wiped out.

[InterceptPoint]

Unless spending is immediately cut by a significant fraction, like a third, there is no alternative to QE3.

That has been my assumption as well.

But it has occurred to me that all that Fed/Xerox "liquidity" setting in the banks might be the substitute for QE3. Let the banks buy up the new Government debt. I think the inflationary impact would be the same but it would allow the Fed to keep it's "No QE3" promise.

[Cringing Negativism Network]

China?

Still wondering whether the commodity sell-off was China repatriating yuan, preceeding a planned revaluation - after which those yuan will have more purchasing power.

Imagine if the recent free-fall in prices were to be followed by a re-investment by all that liquidity - except now the liquidity is worth more...

Consistent with that options position anyway.

[Red Badger]

[Buckeye McFrog]

The only “gold” here will be “political gold” when some Leftist politician finally decides to start making an example out of Grrrrrreedy Speculators. The public is just in a mood to lap that up.

[Cringing Negativism Network]

Wondering what the insider-trading implications would be, if the buyer of these options knows something, and is seeking to profit on that knowledge...

Would the options be nullified?

[blam]

Albert Edwards: We're Not Ready For The "Frenzied Orgy Of Balance Sheet Debauchment" Yet

" Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins."