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Are Traders Buying into Gold's Breakout?

GLD made a technical breakout today, hitting all time highs-- but I feel that it may be under-subscribed. I took a quick look at marketwatch.com, and the GLD news was not above the fold; rather it was being treated as back-page news.. It feels as though there hasn't been a good bout of speculative fervor in the shiny-but-lacking-intrinsic-value-asset, so it's definitely worth a look here.

Here's the interesting part-- in the GLD options market we saw two things happen today:

1. Option volume was above average. We saw 227k calls and 184k puts traded, compared to an average of 93k and 81k, respectively. Clearly the option players were in as we did see a very fast move on the open. This could be a contrarian sign, but here's the interesting part...

2. GVZ is near 52 week lows. GVZ is like the VIX for GLD options-- it measures the supply and demand for options premium. GVZ behaves diffeerently than the VIX in that you will sometimes see positive correlations with GLD and GVZ, whereas the VIX/SPX correlation is around -.80. That is because there is a higher upside "risk" as gold running higher is often perceived as a fearful, hyperinflationary trade. But we didn't see a huge pop in the GVZ, it's still very low.

That is telling us that the expected pop in GLD is being under-subscribed in the options market, and the overall sentiment is confirming it. It's as if the move to all time highs in gold is being brushed off as a trading opportunity. This could make for a very nice contrarian momentum play-- structuring your risk with call buys or delta-positive straddle buys.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/