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If you have been watching the implosion of the euro, the wild stock market, the EU bailout, the flight to anything of quality and every other metric moving these global markets in recent weeks, then it has been impossible not to have seen that gold hit a record high above $1,240 per ounce.
And pretend for just a moment that you are European. If you took the highs of the euro against the U.S. dollar from 2009 and apply it to gold today, it would feel like gold was trading at more than $1,500 per ounce.
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Maybe gold will keep rising. If the dollar keeps rising against the euro, and if the euro loses its status as a real currency, then the price of gold may go up and up.
But if you are of the mind that the regulatory, governmental, and corporate powers that be will keep the wheels from blowing off the axles, then it is time to protect some of those huge gains and start speculating for a downward move.
Calling Out Gold by Buying Puts
The easiest and most liquid way for any equity investor to play this is by using options on the SPDR Gold Shares (NYSE: GLD). The market cap is around $47 billion, the ETF trades about 16 million shares each day, and the options are very liquid.
The May options don’t give us enough time, but June contracts give us enough that we don’t have to fret about each $1 move in gold.
GLD is currently trading above $120, and the GLD June 110 Puts (GLD 100619P00110000) seem to offer the biggest bang for your buck.
Do not misunderstand the intent here. This is not a call that gold is falling back to $1,100 per ounce. The idea is to get exposure in case there is a big, swift move down with enough time value that it could happen and to with enough leverage against premiums and potential upside.
The GLD June 110 Puts at 43 cents have only traded about 350 contracts so far today. But with 35,958 contracts listed in the open interest, it is the third highest of the entire lot of June puts currently.
The GLD June 114 Puts (GLD 100619P00114000) at 95 cents have an open interest of 37,079 contracts and the GLD June 115 Puts (GLD 100619P00115000) at $1.15 have an open interest of 46,406 contracts. But the strike prices of those contracts are too close for real speculation. The action there might be better for locking in upside, but those offer less leverage for speculators.
What about the upside trade? Going the same distance out of the money on the upside is more expensive than buying downside right now as the GLD June 131 Calls (GLD 100619C00131000) cost more than 70 cents per contract.
Generally speaking, and certainly in runaway markets, call options tend to be more expensive than puts. It isn’t just that the market trend is in that favor, but it is also because it is a more crowded traded. And Joe Q. Public almost always wants to bet on the upside.
In this trade, taking the puts is less expensive for speculation and is far less crowded.
Making a call like this in gold is solely for risk-based capital. The silliness is out there with “gold-dispensing ATMs” and the meltdown of a reserve currency. Or maybe all the rappers have the world convinced that wearing gold jewelry in your mouth really is cool.
