Gold Option Volatility Spikes on Bullish Bets

NEW YORK/CHICAGO (Reuters) – Gold option volatility rose sharply on Wednesday, as bullion investors bet that underlying future contract prices could extend a record rally on signs of more Federal Reserve stimulus coupled with Europe’s worsening debt crisis.

One trade involving heavy buying of out-of-the-money call options and selling of lower-priced-strike calls also helped fuel volatility amid heightened fiscal and financial uncertainty around the world, which is bullish for gold prices.

Gold investor anxiety increased as gold XAU= surged to a record near $1,590 an ounce for its longest winning streak in five years. [GOL/]

“Escalating gold prices speaks volumes about investors fears surrounding the euro zone and gold’s move to unchartered territory has spurred an increase in volatility,” said Andrew Wilkinson, chief market analyst at Interactive Brokers Group.

“That is reflected in a rise in the CBOE Gold ETF Volatility Index, as dealer demand for both calls and puts increases in anything that shines.”

The CBOE Gold ETF Volatility Index , which is often referred to as the “Gold VIX” and is based on SPDR Gold Trust (GLD.P: Quote) options, rallied for a third consecutive day to around 19, its highest level in two months.

COMEX gold options floor trader Jonathan Jossen said one investor sold a large position in $1,600 December call options and then bought twice as much in $1,750 December calls.

“It’s been call buying here all morning, all day,” Jossen said.

Heavy call purchases suggest buyers expect underlying gold futures to rise further.

Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com, said that call volume is heavily outpacing put volume at near-the-money strike prices

$154 and $155 on GLD by a ratio of greater than 2-to-1, indicating options traders are betting heavily on gold rising in the near future.

Traders often refer to SPDR Gold Trust as GLD, the ETF’s ticker symbol.

Other option traders also reported strong buying of upside call options in the stocks of gold mining companies.

TD Ameritrade chief derivatives strategist J.J. Kinahan said that the option volatility of GLD has spiked over the past few days for two reasons.

“One, speculators have come in heavily to buy GLD calls, and two, this ETF is based on a commodity, and as commodity prices increase, volatility also normally rises which is unlike the inverse behavior we see in the volatility of stocks.”

(Editing by Lisa Shumaker)

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