Has the (Anti-) #Gold Rush Begun?

Options investors are betting they can profit from falling gold prices with bearish puts

Has the (Anti-) Gold Rush Begun?

By STEVEN M. SEARS |TUESDAY, FEBRUARY 19, 2013

Barrons

Options investors are betting they can profit from falling gold prices with bearish puts.

Gold bugs beware.

Investors are assiduously positioning deep in the options market for gold to edge lower even after last week's decline of almost 4%.

Investors are buying bearish puts and selling upside calls as the SPDR Gold Trust pauses after last week's sell off.

With the SPDR Gold Trust (ticker: GLD) at $155, investors are amassing positions that would increase in value if the exchange-traded fund dipped as low as $151 during the next three weeks.

A four-point decline is admittedly not apocalyptic, but it reveals shifting sentiment on an asset that has sustained legions of people since the credit crisis weakened trust in the integrity of the world's financial markets and systems.

The typical trade in recent years has been to buy the gold ETF as well as coins, while using options to buy more gold should the price decline, or to speculate that gold's price will keep rising.

Now investors are playing defense, betting on gold's decline. Options that expire on March 1 and March 15 are attracting most of the action. Particularly active: Puts that increase in value if the fund drops below $151 or $152. So are $157 calls that appear to have been sold in anticipation the fund's price remains under pressure.

Trading volumes are not large enough to make a definitive statement, but they are significant enough to telegraph a message of caution. Some trades total 1,000 contracts, which equals 100,000 shares of the gold ETF.

A look at gold's one- and six-month chart shows prices in an unmistakable decline. The SPDR Gold Trust is down 5% in the past month, compared with a 2.5% total return gain for the Standard & Poor's 500 Index.

Investors who want to speculate on gold's demise, or hedge their own gold investments, can consider the March $151 puts that expire March 15. The puts recently traded at 86 cents. The expiration was chosen on the assumption that some investors may soon panic out of gold if the price continues to decline. If that happens, the value of the puts will increase in value. If the SPDR Gold Trust falls to $148, taking out the 52-week low of $148.53, the March $151 puts would be $3.

The put's return profile is attractive, but do not be blinded by the potential profit. The trade is based on crowd sentiment and a review of recent fund performance. Those are legitimate reasons to initiate a position, but such trades are animal spirits trades. You are banking the crowd panics and hits the eject button. This is a lot different than trading off fundamentals or events, so babysit the long puts and take profits when you can, lest the crowd suddenly zigs rather than zags.

Steven Sears is the author of The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.