Gold prices jumped this week as the U.S. dollar weakened. This positive price action helped boost the SPDR Gold Shares (GLD), which was last seen trading up 1.2% at $122.90 -- on track for its second straight weekly win, a feat not accomplished since early September. Nevertheless, one GLD options trader is bracing for steep losses for the malleable metal in the near term, possibly bracing for a sharp retreat following the December Fed meeting.
At last check, 98,674 puts and 65,718 calls have traded on GLD, more than two times what's typically seen at this point in the day, and total options volume pacing in the 94th annual percentile. The December 110 put is most active with 57,150 contracts exchanged, and it looks as if new positions are being purchased -- a theory echoed by Trade-Alert.
If this is the case, the goal is for GLD to sink below $110 by expiration at the close on Friday, Dec. 15 -- a time frame that includes the Federal Open Market Committee's (FOMC) Dec. 12-13 policy-setting meeting, where it's largely expected the central bank will pull the trigger on a rate hike.
Looking at the charts, the last time the SPDR Gold Shares were seen below $110 was on the first trading day of 2017 -- with GLD up 12.4% from its Jan. 3 year-to-date low of $109.37. More recently, the shares have been trading in a tight channel of higher highs and lows since late October, and are on track to close north of their 50-day moving average for just the second time since September.
Against this backdrop and given how deep out-of-the-money those December 110 puts are, it's possible those long gold are using the options to hedge against any post-Fed losses. Whatever the reason, low volatility expectations are currently being priced into short-term GLD options, making it a prime time to buy premium on the fund. Specifically, its Schaeffer's Volatility Index (SVI) of 10% ranks below 90% of all comparable readings taken in the past year.