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Buyer Of December $1,800 Gold Calls Back For Second Day In A Row, Gold Options Market Approaching Talebian "Fat-Tails" Proportions
Courtesy of FMX Connect, which has shared this premium subscriber update with Zero Hedge readers.
Summary: April Gold settled at $1332.10 per troy ounce, a loss of $8.20 for the day. Volatility was softer across the board despite buying in puts and calls in June and December respectively.
Analysis: The day started with December volatility being offered in risk reversal form. Volatility continued to soften through the front months until late morning when the December 1800 C buyer resurfaced (ZH: And if the rumor of who the buyer is ends up being true, this will be a doozy...). Iron butterflies are synthetically offered as dealers offer straddles and funds buy wings.
Commentary: The fat-tailed aspect of gold options is approaching Nassim Taleb proportions, especially in December. Calls between the 1800 and 2000 strike area are constantly bought. Puts from June on back with a value under $5 are also consistently bought. Meanwhile you can buy all the 1400 calls in any month you want at any time. Taken together this can be translated as “We’re not moving anytime soon but if we do we aren’t stopping.” We reiterate our statement that volatility will firm up if we settle below 1325 or above 1346.
Dealers are definitely not playing from the bull side. This may be from direct producer hedging layoff, or long OTC liquidation that they are flow trading around. They buy puts and sell straddles without hesitation, but almost never participate on the sell-side of wing calls in the Z11 1800 to 2000 area. There just are no natural sellers of tails anymore, and the result is Comex members and marketmaker firms have most of the shorts in them. If Gold were to go to $2,000 it could be lights out for most of the Comex community. Open interest in these 2 strikes is a staggering 34,000 contracts. That is 340,000 equivalent to you GLD types.
Active Options
- Z 1800 C trds 12.20-12.80 2000x (Comex)
- Z 12 800/900 PS trds >1000x (OTC)
- M 1050 P trds 2.20 1000x (Globex)
ATM Volatility Curve:
Volatility Smile:
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What? Egypt off the board here too? How’s that possible?
“The real news today is coming from Egypt, where history is currently being made and a regime is in the process of being overthrown . . .”
For those who want to follow along:
http://www.guardian.co.uk/news/blog/2011/feb/02/egypt-protests-live-updates
We're watching!
It's a non event.
This article needs more cowbell.
Less you would probably help.
Don't start with me, mosley.
Your prior attempts to debate me where sufficiently embarrassing for you.
Fortunately you do a good enough job embarrasing yourself without needing any help.
You kept saying that, but that didn't make it so. Why do you think it would now?
You really ought to just get out of here.
I'm waiting until you tell everyone that 95% of your portfolio is in rice and cotton.
But certainly not futures. Real physical rice and cotton stored in your closet, next to your Halloween costume of a real commodities trader.
Even I'm starting to think the markets and the Street are taking this a little lightly. If the sun rises in a few hours and the violence escalates there and elsewhere, the market might take notice.
Something will be the excuse for a very sharp and quick pull back. Whether it's spreading Middle East violence of jobs report, I think we're in for a very quick violent pull back to the 50dma in a day or two.
wow Harry. I'm very impressed.
Not bad, for a Keynesian.
Somebody hacked Wanger's account!
Harry who?
"We reiterate our statement that volatility will firm up if we settle below 1325 or above 1346."
Really? Really? Well, no shit. There's some expert analysis for ya.
Smelling salts anyone?
Good thing I was sitting down when I read this.
Something will be the excuse for a very sharp and quick pull back. Whether it's spreading Middle East violence of jobs report, I think we're in for a very quick violent pull back to the 50dma in a day or two.
I say just the OPPPOSITE will happen.
We have a CONTAGION effect already running, where this takes us, and the world mkts is dependent on how much worse it gets, and mainly WHO comes to power.
We get Muslim BroHood in power, and a few more ME countries stirring the shit, we will have witnessed the destruction of the Middle East.
That leaves Israel, and the USA.
That leaves Israel, and the USA. ?!?
What does this mean? Is this some kind of secret code?
What happened to China?
What happened to India?
Where did Europe go?
What happened to all of South America, Canada, Mexico, Australia, N. Zealand, American Samoa?
Yes, Harry, that's a rational opinion. However, since this market is totally controlled by the FED and its favorites, it just might take off on bad news. Just like PMs not taking off on huge disorders.
He even has 'junks', people probably just see his name and automatically junk him.
Can anyone here translate gobbledy gook to English?
options traders, just like bond traders, like to speak in code. Partially to confuse, partially to make themselves feel smart.
To the upside, or downside, or we don't know?
Whatever limit is broken first.
depends on the directions Blythe's smoke signals and frog kites spin each day
prophet quoted:
June puts covers the 'we aren't moving any time soon'. December 1800 calls covers the 'if we do we aren't stopping'. (expected to the upside). !800 June calls would be cheaper (less time premium) but the buyer doesn't expect the move that soon. But the 1800 strike on the December calls speaks for itself as to which direction the buyer expects the ultimate move to be.
There ya go.
"Can anyone here translate gobbledy gook to English?"
Somebody is buying a buttload of 1800 Gold calls. This is unusual as options that far out of the money, are usually for the sucker trade. To see that kind of action usually means somebody with deep pockets knows something, called inside information.
The calls are on the December gold futures contract. So, someone is betting on a big move in Gold before next December.
By the way Gold doesn't have to go all the way to $1800 an ounce for the buyer to make money. If Gold shoots up fast the calls gain in value and they gain value faster, the closer the price gets to $1800. This is called Delta. They also get bid up more, if the market has a lot of volatility.
There are other details to it but that is the main point he is talking about.
The rest of it means, the options markets are way out of balance. COMEX dealers are like bookies. They don't bet themselves they take other people's bets and make money on the vig. They are happy when they have the same amount of money bet on both sides of the market, that way they can't lose. Right now all the action is on one side and if the price of gold shoots up to $2000 they are toast.
Usually you have around the same number of buyers for various calls, with the close to the money calls being most popular, and getting less popular the farther out you get. But right now the 1400 calls are not selling, while someone is buying the 1800 calls by the dump truck load.
This is unusual. It may mean something. We will see.
Well said. To add, most dealers are ok (GS, HSBC,Barclays, JPM Et al) . It is the marketmaking principal firms that will fry if we rally. Locals and other liquidity providers.
Meant to say also, an increase in volatility can send the price up and this is called Vega. If the price of gold shoots up fast, the combination of delta and vega can easily double the value of the 1800 option in a day, even if the price of gold does not get anywhere near $1800.
Thanks Diogenes.
Could it also be the bad guys taking out insurance on their shorts on the cheap?
Excellent. Thank you very much Diogenes.
"To the upside, or downside, or we don't know?"
They also say, they are selling a lot of cheap (under $5) puts. This means someone is betting gold is going to tank. So it could go either way, depending who is right. Or someone is buying insurance against the s hitting the fan.
"Or someone is buying insurance against the s hitting the fan."
Thank you sir.
Thanks.
I skimmed the comments and didn't see any mention of the $600 1099 requirement buried in the Healthcare bill that was planned for January 1, 2012. I heard the Senate shot it down, but it looks like someone is betting they will get it passed. If it even has a chance of still passing late in the year, there will be a HUGE rush into the PMs market to beat the deadline.
Thanks Diogenes.
Simple and clear explanations are too rare on this site. You didn't use many more words than the original article, but you certainly improved on the quality of the message received.
I'm glad my post meant something to so many people.There are a lot of very smart articles here with valuable information, but they sometimes get a little technical. I find I have to translate them into plain English before I can understand them myself.
This gives me the mental image of a roulette wheel spinning while bets are being placed. Time running out, wheel spinning slower (notice how the closing price range for gold has been so narrow from one day to the next lately?), ball's about to drop.
The uncertainty factor....gold is the safe haven, but equities are rising so high. It's the lure of the drug...traders know it will end badly, but they are making so much bank they can't stop even though they know the only thing driving equities is liquidity injections.
remember the inverse PM-equities action last Friday? That's a glimpse of what amageddon might look like. and the dogs are a barking.
so...don't keep us in suspense --- WHAT's THE RUMOR? who is supposed to be the buyer of all these calls?
The Bernank ;o)
GS who else? of course through some intermediary vehicles
no. butthey didnt sell them.
One of these days, unfortunately, a suitcase or a missile nuke will be launched, a major government will be violently overthrown(Tunisia doesn't count), or gas will go to $4.50-$5 here in the US. I put the probability of one or a combination to be at least 50:50 over the next 12 months; 75:25 over the next 5 years. Thus, gold to $2000 is a no-brainer, down to $1000 is only in Blythe's/Ben's/Timmie's wet dream fantasies.
It will happen, but why 50:50 over next 12 months but only 75:25 over next 5 years? I'd go more like 30:70 next 12 months, 99:1 over next 5 years.
Margin calls, sell off, demand collapses, deflation.
But on a long enough timeline, they all happen.
Fortunately, on that timeline, we'll already be dead, so it won't hurt half as much.
Just like peak...oh never mind ;-)
And seeing as how you're part of the incredibly experienced class of '09, why exactly would those be your odds?
it will indeed be interesting where 'something' happens...I think it will be someplace completely unsuspected.
Well, papa, one things for sure.
There is no shortage of Black Swans circling.
Them ain't Black Swans. Them's Vultures!
always have to read your posts with a dictionary and symbol list on hand.
Looks like everybody's assuming this low vol is going to go on forever, except your noted call buyer. I wouldn't be looking to buy tails, but a long straddle looks very enticing here.
I wouldn't be looking to buy tails, but a long straddle looks very enticing here.
+1
No kidding, I just put "fat tail" into google and it got ugly quick.
Throw in a strap for good measure.
"ZH: And if the rumor of who the buyer is ends up being true, this will be a doozy..."
WAG: Could it be a humongous mutual fund in an aspiring banana-republic now worried about the effect of inflation (caused by its 'partner' central bank) on its HUGE bond portfolio...?
WAG: The Fed?
I have not heard the rumor. I would like to.
if it's pimpco, I might consider investing in their funds again.
Sorryos,Chinese,Sprott, Paulsen(just banked 5B),could be any of the big dogs,even Timmay.
"Sorryos,Chinese,Sprott, Paulsen(just banked 5B),could be any of the big dogs,even Timmay"
Or one of the ETF's that has a hunch there is gonna' be some calls placed by the Big Playa's (who are the only ones that can demand payout in physical)?
"December 1800 C buyer resurfaced (ZH: And if the rumor of who the buyer is ends up being true, this will be a doozy...)"
So, Tyler, who's the rumored buyer? Any hints? A big giant, CB side bet, or a sovereign?
If it is any buyer associated with china we are fucked if it becomes public knowledge......please dont be china. Hopefully it is just an ordinary billionaire bored with monte carlo
that would be me & Dr. Faber
"zey vill konfiskate it"
"fiat! fiat!"
GC
http://www.flickr.com/photos/mo_chi_chu
Marc-y Marc has been talkin down de metals, short term. True dat. Ever body talkin' de book, even de doc-tor of dooooooom.
Just looking at GLD options volume today:
December 2011 Expiration
Strike Vol
$150 37
$155 0
$160 0
$165 150
$170 1,351
$175 35
$180 0
not so surprising. I mean, come on, Zimbabwe Ben shows no sign of stopping, the dollar is starting to teeter. if only we could buy all the gas and milk we need over the next couple of months as easily...
this is all going to end so, so, so badly.
Unfortunately, Dec. 2011 expiry in GLD does not correlate with Comex. Comex Dec expires in November. Look for the Nov 2011 GLD as a better vol proxy if there is one. But look for Jan 2012 options as a more important expiration for entirely different super secret reasons. Good luck
There are no November 2011 Options for GLD but...
January 2012 Expiration
Strike Vol
$150 12
$155 1
$160 129
$165 6
$170 1,786
$175 40
$180 3
$185 4,326
I love super secrets. Care to share?
it is just the way they list options on GLD. the Dec gets no love, and the Jan does. has to do with their quarterly options as you go further back. That and often times the origin call buying STARTS in Jan GLD options, and the Dec 11 Comex options get bt by marketmakers against it because that is the most liquid month on Comex. Commodity funds buy Comex, equity funds buy GLD. Fund bylaws determine the orderflow. Paulson for example could buy in both. SAC in GLD, Man fund in Comex. Point is there is just more money in equity funds. GLD is now the tail that wags the dog in options.
Thanks for all the hints. I have no clue.
But I'll give it more thought.
I going to nod my head and pretend I know what this article is talking about the same way I do when my brother explains the odds of all the proposition bets on the craps table. I just bet the pass line.
When betting with numbers:
4/10 - true odds 2:1, casino pays 9:5
5/9 - true odds 3:2, casino pays 7:5
6/8 - true odds 6:5, casino pays 7:6
There being no natural seller of tails anymore says something. Dealers dont hesitate because they are fully hedged and just exposed to the commission. Yes a fat tail is always the risk here, but are retail and hedge fund specs ( not those who are truly hedging) about to lose money again? Oh wait.... cramer just reccomended armh and akpt.....booyah!
No prem in the tails...Oh! Look! A white rat....named Ben announces end of QE.
It was Smailes. Closet doomer.
If turmoil kicks up in pakistan and look out...
Time maybe to pick up some cheap calls. But fucking December? The market could be operating on short wave by then.
in volatility terms, there are none. In premium terms, the J 1500 is a 1.50 premium item. Best bet with limited capital, buy a tight Z11 call spread 1500-1550.
I was just taking advantage of a chance to be funny, but maybe you're right. The environment has become so crazy that I just can't find any position except physical compelling at this point.
bingo.
Let's get physical...physical...I wanna get physicaaalll.
Ok...I'll junk myself...LOL.
Could be someone in the know...frankly 3rd world turmoil is dictated by the big boys. 2 wars are winding down and many countries made bank on it...I don't think they are ready to cut that profit loose.
straddle plays on a major risk gld call, that is a hedge fund most likely.
With majority shorts and some one buying a huge call positions.
a player making bets on 1800/2000 on gold yet risk commod crossess (FX) are still overbought? bad bet. watch china i reckon.
better off buying calls oil and sugar,wheat
If china did it and they want it to come to fruition they will find a way to publicly disclose their position by accident
good point on the wasted money. But that is why you cant get too crazy about call buyers. often times they buy calls because they are NOT that bullish. otherwise they'd buy futures. you just cant tell.
i think the arbitrage trade, and this is a assumption, would be sell gold, buy oil. another assumption is that major players are going to play that.
what i did hear were buyers at gld @1300 close to Jan 27/28 lows
Jim rogers must be happy, suger spiked and should stay high...will freak china out.
+1.
Great point. Call options could be part of larger equation, just a variable in
some quant wet dream. Futures, however, are a commitment.
Exactly.
I am extremely bearish on Gold, and I own a ton of puts.
But I also have some calls and a few other positions that will work out in the event I'm wrong.
Buying long dated out of the money calls on gold could be considered a similar trade to buying long dated out of the money puts on the S&P - but it has a different pay off characteristic. It wins in some scenarios where the S&P puts don't.
For example - think about what happens if S&P runs hard through June, Gold underperforms equities (but still moves up), and then we get an unforseen shock in the system. The calls will be much more valuable in that scenario than puts on the S&P...
There are countless reasons to buy these calls - it basically says nothing about where the Gold price may or may not be going.
Hopefully its not the same dude that had the 82m screw up, with a 10m fund limit.
It sure feels like any day now a correction will begin. Everything stretched to the breaking point.
Today was an interesting day. DJIA up, UUP up, TLT up.
SPY volume was surprising considering the weather and late open at the CME.
Vol / Avg. 117.64M/120.37M
If I understood trader talk, I might have squirted.
Salacious!
but you can't eat 1800 calls!
One of your better efforts...even broke a grin.
thanks for the encouragement
it warmed my heart
Alright, I have to ask you this Jon. Is your heart made of gold?
Well, not all in one meal anyway... ;)
Does the person live in Omaha?
we'll let you know when we know, but he is a silver bug. and you can't truly squeeze Gold, banks will step on you.
slim
Slim Shady?
sweet!
"we'll let you know when we know, but he is a silver bug. and you can't truly squeeze Gold, banks will step on you."
sounds like you already know.
Does his name rhyme with muffet?
Is this a bet the USD won't get up off the mat this time?
Volume in 30 strike SLV leap calls today too.
volume in 28 strike slv leaps larger
I'm getting excited
Someone needs to re-write this article and explain the consequences in terms your average retard can understand.
Sell a teenie, lose your weenie. There is no exit liquidity anymore in way out of the money lottery ticket type options. And buying a meatier option t ohedge directional risk will probably just make you lose premium net-net. so the market is making it hard to trust in statistical relationships now.
Sell a teenie, lose your weenie.
I've got it. You've put it in terms I can understand. Thanks.
+10
A lot of poster-teaser but nothing in plain good olde english
see right above ^. The content is intended for professionals. We stopped by to help translate a little.
Mr Frog:
In spite of my general dislike for the French, I shall attempt to enlighten you (as much as that is possible.)
A bet for either gold towards $1800 or towards $1000 (but not between) means that the bettor thinks it will most likely either end in a bang or a whimper (but most definitely that it will end.)
Mucho gracias cowboy
Mr Frog:
Or, that either massive inflation or deflation is the likely outcome in the near term.
(Just for entertainment's sake.)
Ahhhh.
Thanks.
-
Thats too many tits for a innocent Irish boy - delete baby.
keep posting! keep posting! /sarc Awesome, indeed, but I am getting dizzy...
Did Muir post words...I didn't notice.
Seems like it's been a while since I've seen my favorite bouncing bosoms.
I love the french...
They've always been there when they've needed us.
Don't forget...DeGaulle broke the Fed and forced Nixon to close the window.
Oh I know... its a comment from the blue pill days. But remember frenchy is comlicit nowadays. Although the people closer to awakening than our prozac nation.
I like that; quote of the week so far
$100 that those options expire worthless. Anyone want to take the bet?
I hear there is actually a way you can bet those calls will expire worthless in the exchanges. Just something I heard somewhere one time.
Digital options, knockins , knock outs. Trading on the option delta. Z11 2000 calls have a 4 delta. They theoretically have a 4% chance of expiring in the money. So i think 25 t o1 odds works. how much they expire in the money if they do get there is entirely different.
So the market on if they expire in the money would be 30 to 1 odds bid / 20 t o1 odds offered. or something like that.
ill take that bet, but not at even money. 100 bet to win 3,000. I'm hedged.remember, they don't even need to go in the money for the owner to make money though.
30 to 1? For that, I might as well take the other side. December 180 GLD Calls have an ask price of $1.30. So GLD has to be at $219 in order for option holder to make 30 times his money.
Correct - people don't alwasy buy puts and calls becuase they think the option will be exercised.
June 100s on GLD for 25c make money in plenty of scenarios where GLD doesn't break 100.
I just need to have my Gamma and/or Vega pick up to exceed my theta decay.
$1800 seems like quite a stretch, but from the way things have been heating up lately I really can't say that is a long shot.
Could the buyer be William Gates?
No. He has too much money. He'd just buy the metal. His banker however, may just buy some calls right before he buys futures for him. LOL
Why would gold go significantly higher? because the USD could go significantly lower.
Look at UUP. Longer term chart. I see the Usd hitting the floor for the FOURTH time.
There is a saying. "There are no triple tops".Meaning price almost always moves through a triple top. In currencys i have to believe that there are no triple bottoms. I don't see much support below.....
gh
Two items stand out.
Jim Rickards says to get out of dollars right now.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/1/31_Ji...
Eric Sprott thinks gold may hit over $2100.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/1/28_Er...$50_Silver,_Gold_Possibly_$2,150_by_Spring.html
These are sharp men. I wonder if they are thinking the same thing. The dollar is going to drop. The reason may be the announcement of QE3 or the announcement of raising the debt ceiling by Congress. Perhaps COMEX will default on its gold or silver delivery. May be the food riots and cotton going crazy will set things on fire. There are so many things to tip of hyperinflation. I feel like I'm being sensationalist but I don't see how things are getting better with all these problems and the massive debt only getting bigger.
They are sharp men. Damn sharp.
They are also salesman.
Not saying they are wrong, or trying to mislead, but I have a healthy reservation towards salesman of all stripes.
Two more interesting KWN guest commentaries:
=======
James Turk - Gold & Silver Have Reached an Important Bottom (interviewed last week)
With volatility continuing in gold and silver, today King World News interviewed James Turk out of Spain. When asked about the action in precious metals Turk responded, “Through Friday’s close on the LBMA, silver remained in backwardation, even by the numbers reported on the LBMA’s site. The strong bounce on Friday after the option expiration combined with the backwardation is clear evidence that silver doesn’t want to stay down here in this area and is ready to move higher.”
Turk continues:
“If we get silver above $28.70, that will reverse the trend followers from short to long. The number on gold is $1,378. This is what is going to take gold and silver to new highs. You will see open interest expanding as people who were shaken out come in and put on long positions.
You have to keep in mind Eric that this little shakeout over the last couple of weeks has done nothing to change the very bullish fundamental factors that have been driving gold and silver higher. Most significantly the CRB CCI (Continuous Commodity Index) is at record highs. There is simply too much money being printed around the world and this monetary debasement is behind the ongoing bull market in gold and silver.
There is a relationship between Brent Crude and West Texas Intermediate with WTI normally trading at a premium to Brent Crude. However, over the last couple of weeks, Brent has climbed to a huge and record premium over WTI and has remained in the high 90’s. At one point Brent was trading as much as $12 higher than WTI which is unheard of.
The significance of the way these two oils are trading is that Brent is a more accurate reflection of global oil prices and is therefore mirroring the record high prices we are seeing in the global food indexes.
Given the usual close correlation between the CCI and global crude oil prices and gold and silver, we can reasonably conclude that the correction in gold and silver is over and that the precious metals are going to start climbing higher.
As further evidence that we have reached an important low, bullish sentiment and the commitment of traders report are at levels seen at important bottoms.”
For those of you who are making monthly purchases of physical gold and silver, continue to do so and do not try to time these markets. Evidence is mounting that both gold and silver are putting in a floor to the downside near these levels. It will be interesting to see how high the next rally takes them.
=========
Chinese Gold Demand Stuns London & Hong Kong Traders
KWN has reported on this for months, “Precious metals traders in London and Hong Kong said on Wednesday they were stunned by the strength of Chinese buying in the past month. ‘The demand is unbelievable. The size of the orders is enormous,’ said one senior banker, who estimated that China had imported about 200 tonnes in three months.” That quote was from the Financial Times. King World News today interviewed Dan Norcini to get his take on this situation.
When asked about Chinese demand Norcini stated, “Your sources have been reporting for months that demand from Asia, particularly China has been staggering, especially as the market has moved lower. This FT story has simply confirmed what King World News has been reporting for months, and that your sources have been accurate.
It’s apparent to me that there has been a very large buyer in the gold market, particularly on moves down towards the low $1,300’s on gold. It is obvious now that China has in fact had an insatiable appetite for gold. This explains why we have had such a huge drop in open interest in the gold market, while gold has only fallen a mere 6%.
Open interest has fallen almost 30%, but as I said gold has only dropped 6%. Normally if you are a short in a market and you start to have an asset correct because of significant liquidation, you will see a precipitous drop in price. Given the sheer volume of contracts that has been liquidated, we should have seen a massive correction in gold. Instead it has stayed incredibly strong. You can see the footprints of the Chinese buyers, it is becoming very obvious to all of the players in the gold market, and this is causing the shorts to have to cover prematurely.
I think the key here Eric is that inflation is roaring out of control in Asia, particularly in China. While the western monetary authorities are doing their best to convince their citizens that inflation is not a serious problem, the reality is quite different. To quote Bernanke, ‘Fear of inflation is overstated.’ The citizens of Asia and other regions are not impressed with such statements. Those people have been buying gold and they will continue buying gold as long as inflation is alive and well and I see no end to that in the foreseeable future.”
As Dan Norcini said, King World News has reported on the massive Asian buying, particularly from China for many months. Norcini knows these markets well, having traded them for over two decades. He is now making note that there has been a significant change in the trading pattern of both the gold and silver markets.
Excellent comments referring to fundamentals which are beginning to prevail. Thanks.
This just in, literally, from out of no where. Black Swan dysmorphic event?
Not sure, but it is a real doozy... keep it super secret or men in black will come for you.
Breitbart.tv » UFO Over Jerusalem?
Pretty damn cool
Picture looks like a still. Lights don't move with the camera angle.