A million-dollar gold bear emerges ahead of the Fed decision
While gold prices remained stable on Thursday, decreasing hopes for interest rate cuts in the near term due to the strengthening dollar and high oil prices continued to weigh.
Hans-peter Merten | Image Bank | Getty Images
If an options trader gets his way, one of last year’s hottest trades may be over.
In one of the most interesting macro trades of the day, someone sold upside call risk. SPDR Gold ETF (GLD) At the same time, downside buying increases risk in a two-way trade that both brings a million-dollar loan and creates the potential for big gains if GLD falls at least 15% by mid-July.
The investor sold 4,000 of the $450 strike GLD calls expiring July 17 for a $3.1 million credit, then purchased 8,000 of the $360 strike puts expiring the same day for $2 million. This means that as long as GLD remains below $450 by expiration, the trader will essentially be paid to place a long-term bet on a major collapse of gold.
SPDR Gold Shares, 1 year
This is a contrarian view in the context of gold’s 125% three-year rise. But precious metals have struggled since late January, when GLD hit an all-time high of $510. Perhaps it’s no coincidence: Trader’s upside breakeven price — $450 — is almost exactly April’s high price.
One way to interpret the trade could be a proxy bet on the Fed and interest rates. GLD hit its lowest level since the beginning of the year in March as the 10-year Treasury yield rose above 4.4%. Fed fund futures traders don’t expect any changes from the central bank later Wednesday, but headwinds in gold’s interest rate may be slowing amid volatility in crude oil prices and the appointment of a new Fed Chairman.
Gold fell slightly on Wednesday, with GLD down 0.6% to $419.34 in early trading.
