(Kitco News) - Comex gold potentially could get a modest lift in the next couple of days from activity related to an options expiration set for Thursday, although any impact also may well end up being nullified by the improving U.S. macroeconomic picture, traders said.
Expiration of October options for gold and silver is scheduled for Thursday.
A call option gives the holder the right to call, or buy, a specific futures contract at an agreed-upon price during the life of the option. A put gives the holder the right to sell a specific futures contract at an agreed-upon price. Jockeying ahead of these expirations often impacts prices in the short term and can add to volatility. Of course, this would be trumped if there should be some major breaking news event or the market accelerates through a key technical support or resistance level.
Preliminary CME Group data through Monday show that the number of open positions for puts in October gold options was 70,272. Open interest in calls was 95,087.
Gold has come under pressure so far in September, with the December futures declining from a $1,287.40 close at the end of August to an eight-month low of $1,208.80 Monday, before bouncing on Tuesday.
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“We see gold getting a little bit of a bid today,” said James Ramelli, trader with KeeneOnTheMarket.com, which focuses on options. “But we’re seeing quite a bit of volume on the put side in the October contracts. This could be people buying more protection or covering short puts that they had here.”
There is a lot of open interest in strikes at $1,230 and below, he said. However, he continued, the point that may be the “biggest magnet” going into Thursday’s expiration is the $1,240 strike.
As of Monday’s preliminary data, the number of open positions for puts at this strike was 3,973 lots. There were even more just above this at $1,250, with open interest of 4,994. Meanwhile, open interest for calls at $1,240 was 1,795.
“I would expect that ($1,240) to act as a big price magnet going into the end of the week, but with the price of gold so volatile over the last week and a half or so, I don’t know if it’s going to quite get that high,” Ramelli said.
Ramelli outlined the type of options-related activity that could impact prices at nearby strikes with high open interest.
“Anyone who is long those $1,240 puts has to buy futures below $1,240 to cover their position,” he explained. “And, anyone who is long those $1,240 calls has to sell futures above $1,240 to cover their position.”
The most-active December futures touched $1,237 early Tuesday before backing off. Ramelli said gold still could run into headwinds trying to reclaim $1,240 due to the macroeconomic backdrop. Markets generally are factoring in an improving economy, which has traders anticipating the start of hikes in the federal funds rate some time in 2015.
“You have to understand the bigger participant in the market is the outright futures trader,” Ramelli said. “His volume can still trump the options traders’ volume as they’re coming in to cover their positions, especially with all of the macro forces in play at the moment.”
Jim Comiskey, senior account executive with Archer Financial Services, also sees potential for gold to tick higher into the options expiration. The busiest calls on Friday – when gold was on the defensive -- were at the $1,250 and $1,225 strikes, which traded around 350 times each, Comiskey said.
“When the futures run that extreme, as the (precious metals) did on Friday, all of a sudden there is a lot of money invested in those strikes that is going to go off pretty much worthless…,” Comiskey said. “I think there will be a concerted attempt to rally the precious metals between now and the (Sept. ) 25th expiration.”
He added that this short-term view was reinforced by the softer tone in the U.S. dollar so far Tuesday, which is helping gold to rally. Around 11:35 a.m. EDT, the December dollar index was down 0.138 point to 84.725, backing down from its recent strength. Earlier, it traded down even further to 84.460.
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While options expiration is approaching for October contracts, December will be the really big month for the options market. For instance, open interest of 144,307 contracts for December puts is already more than double October’s 70,272. Open interest for December calls of 317,234 is more than triple the 95,087 for October. Open interest for November options is far lighter than either October or December.
“There are huge, huge lines of open interest in December,” Ramelli said. “There is a massive line of open interest on the put side at $1,200 (12,265 open interest as of Monday). So that appears to be where a lot of the market might be hedging itself. So I would look for big-time support at $1,200 going into December. If we take out that $1,200 level, look out below.”
By Allen Sykora of Kitco News; asykora@kitco.com
