Big market drops rarely occur when everyone is prepared for them. Will this time be different?
Gold investors already know all about the record bearish sentiment, small speculators being positioned short gold futures for the first time on record, and the various big name fund managers who have proclaimed the death of the gold bull. We get it – with US equities soaring higher virtually every single day, gold is very much out of favor in the current market environment.
However, perhaps nowhere is disdain for gold more apparent than in options on the highly liquid gold exchange traded fund GLD. There isn’t much argument that the GLD has become the marginal price setter for gold due to its massive size and liquidity. More importantly, GLD options are arguably the first place one should look to get a clear picture of how market participants are placing bets on the near term direction of the gold price – let’s take a look:
Click to enlarge
GLD June Options
There are a few things that jump out from the above options quotes:
- Put volume is much more active than call volume
- Put open interest is significantly higher than call open interest
- Out of the money (OTM) put implied volatility is significantly higher than OTM call implied volatility (negative skew) which generally means that option market makers are “charging” a premium in order to sell puts
- The GLD June 130 puts (130 roughly equates to a $1350 spot gold price) traded a whopping 4,473 contracts today with a heavy open interest of 12,278 contracts ( especially considering how far OTM this strike is) – this means that there are large bets being placed that gold will retest its $1321 low of a few weeks ago, and perhaps even fall below $1300
So what does it this all mean? In short, the GLD options market paints a clear picture of speculators who are both bracing for AND betting on a large fall in gold over the next month. Can these hedgers/speculators turn out to be correct? Absolutely. But if there’s one thing that we know for certain about markets, it is that big market drops rarely occur when everyone is prepared for them. Will this time be different?