Big Bet On GLD Volatility

As reported in the Wall Street Journal, an unknown trader has placed a huge bet of SPDR Gold Shares Trust (GLD) options. The bet is on the underlying stock becoming more volatile.

The bet on more volatility in the SPDR Gold Trust runs counter to what the market has seen of late. It has been placid on that front as gold kept steadily advancing to fresh records, including another one Thursday. But if more central banks turn off the easy-money spigot, or if more decide to prolong their policies into next year and beyond, gold and assets linked to it are likely to see more volatility, traders said.

"When banks are easing, that's bullish for gold. When they start tightening, that's bearish," said Etai Friedman, head of equity derivatives trading at MKM Partners, noting that the market hasn't been pricing in large swings yet....

The trade itself is for 15,000 call options on GLD hedged with a 780,000-share short sale. Although the quantities don't balance, quantitative analysis has the trade pegged as "delta-neutral" which means that the fluctuation risk on each side of the trade balances out.


15,000 calls equates to control of 1.5 million shares on the long side. It's true that this trader will be protected should gold fall, but a naive look at the numbers shows a big benefit if gold keeps ramping up.


While I'm on the subject of trading, a new pairs trade has gotten the attention of Barron's Focus on Funds blog. It seems that punters are taking the carry trade one step further by buying gold and shorting the yen. This newfound variant of ther carry trade in partly responsible for short positions in the yen risning 37% last week.

Here’s how it works: A purchase of the SPDR Gold ETF (GLD) is followed by an equally large dollar-yen swap to wipe out exposure to the greenback. That gives an investor a yen-denominated gold investment.

As related by economist Dennis Gartman to Dow Jones Newswires, such a trade can yield a bigger profit than a traditional dollar-based gold investment....

A similar trade was done in gold and Euros. What it amounts to is buying gold in terms of the currency being shorted.