On Wednesday, an unknown buyer made a $1.75 Million Options Bet That Gold Would Triple to $4,000.
The gold options market saw $1.75 million in block trades betting the precious metal could almost triple in more than a year, surpassing the record.
Around noon in New York Wednesday, 5,000 lots of a gold option giving the holder the right to buy the precious metal at $4,000 an ounce in June 2021 changed hands. The bets were sold at $3.50 an ounce.
“It’s like 18-month term life insurance; what will the world look like if gold is at $4,000,” Tai Wong, the head of metals derivatives trading at BMO Capital Markets, said in an email. “They are hoping for a quick violent move,” he said, referring to the people who bought the call options.
Gold Headed to $4000?
For the call buyer, it’s not a matter of gold hitting $4,000 but rather gold hitting $4,000 by June 2021.
Of course one would not have to hold the options all the way through.
If gold suddenly spiked by $1,000 right away perhaps the entity cold sell the options for $15 or more at least tripling the bet. Otherwise these options will quickly decay.
Let’s assume the options are held to the bitter end.
Returns On Options Held Full Term
Return Synopsis
- At a June 2021 price of $4,000 or less, the call buyer will lose $1.75 million.
- Between $4,000.01 and $4003.49 the call buyer will lose some but not all of the bet.
- At precisely $4003.50 the call buyer breaks even
- At $4,000 the call buyer nets $48.25 million ($50 million minus the initial $1.75 million bet).
- At $5,000 the call buyer nets $498.25 million ($500 million minus the initial $1.75 million bet).
The most likely thing, by far, in any time frame is the buyer losses $1.75 million.
Mike “Mish’ Shedlock
Gold going up hugely today. $1645 an ounce. Just 60 days ago it was $1475 an ounce.
Looks like this amazing bet is on course to pay off.
Gold is up over 1% today.
That cant be too bad for his option. Is there a place where we can see the price of the option on the internet, I dont have a clue where to look?
This guy is a genius!!!
We are upon something that we don’t know anything about! In the near future the world may experience the worst recession since late 1800’s
In that case, this guys makes some good money while everyone is going down
He’ll be king of the hill
And if the doomsday doesn’t happen, he’ll keep on making money with the rest of his portfolio (and I’m sure as hell this guy is loaded!!!)
Remember when Michael Burry made a bet against housing and it turned out to be a bet against world’s economy?!
He made 500% profit the day we began losing everything!
If I had 20 million dollors, I would have done the same!
But for now, I’ll be selling gold next week at around 1500 USD 🙂
This trade talks are a gold mine
There is a very straightforward explanation for this type of a bet. June 2021 is 20 months away, and gold would need a 175% price increase to hit 4,000 and those types of moves aren’t even close to recent history. The 20 months before gold hit 1,900 only showed ~75% increase, and to get a 275% increase to 1900 you need to have bought in late 2007, making it a 4 year run up. The only time you have gotten a run up of that speed and magnitude is the late 1970s, so basically this should be viewed as a bet that will only pay out in a high inflationary environment. Now this would be an extremely risky bet to make that the next 20 months is going to be inflationary enough to drive that price move so this can only be seen as a large hedge (or a boneheaded bet, which isn’t a smart assumption). The structure that fits best would be someone or group who is positioning themselves for a large deflationary environment/crisis on the order of the GFC or larger with positions being put based on large price drops, with a major fear being that CBs actually unleash inflation in attempting to fight it, causing real losses, but not the nominal ones they are set up for.
Catherine Austin Fitts had a video on the 27th saying something like this is the first time in a decade she’s predicting the dollar will weaken.
If these are standard call options then the price of those options will increase substantially even if the price of gold only goes to 3,000. The buyer can sell those options at any time before expiry at whatever price they’re trading at and if the price of gold is at $3000 – for example – the price of those options will rise above the initial purchase price assuming there is a reasonable amount of time value left on them.
Am I missing something here?
This is not a bet on Gold hitting that level, it is about kappa (vega) and also the gold basis. Remember that in-the-money-ness of an option is the FORWARD versus the Strike price. So if there was a crisis and gold jumped up possibly also the gold basis would move up so that the FORWARD price move would be greater than the spot price and with the increase vol the trader would make a huge profit. This is not at all a bet on the price of gold at expiry. This trade loses if the markets keep calm for 6 months.
As Mish said this doesn’t make sense, all call options will gain in value from a large increase in volume, and basically all call options lower than 4,000 will increase more in such a scenario. Additionally these options are going to be illiquid as all hell until you get above 3,000 gold anyway, making most of the ‘gains’ from a near by move up to 1,800, 2,000 or 2,500 largely illusory (unless the sellers of the calls wanted to close their position). For these options to have any value at expiration the price has to move on average $130 a month over the next 19 months, so two relatively flat months followed by a 20% price spike in month 3 wouldn’t significantly improve the value of options like these.
I believe this is not a bet based on holding to maturity, it is a bet on a spike in volatility coinciding with an up-move in both gold and additionally increase in gold forward basis, which itself is volatile (and strange).
Also if volatility spikes up and you are selling options, you will have all the liquidity you can dream of.
You haven’t addressed the core issue though, all the positives are true for every strike price below 4000, you have to explain why they choose puts this deeply out of the money.
Pretty sure that is because those wingnut options are WAYY cheaper so you get more leverage. The kappa on long dated options doesn’t care much about being out of the money (dkappa/dspot is low) so way OTM, long-dated calls a good way to make that bet, especially if someone is not paying attention and sells them to you at a vol too close to the ATM.
You don’t get effective leverage though until the strike price nears. A $3,000 call option will move more than a $4,000 option, and a $2,000 option more than the. The extra leverage doesn’t function as leverage until you get at least somewhat close to the strike price, and a $3,000 option is still a wingnut/way out there option. My online brokerage doesn’t go past what are effectively $2,200 options. There isn’t any reason to go for a $4k option over a $3k option unless you specifically think that if gold goes over 3k in that time frame it is highly likely to also go above 4k. The specific strike prices are still meaningful, and (I assume) are chosen at their levels for a specific reason.
If volatility goes up (vega) then the option price goes up regardless of spot price move. If the basis changes (which is weird for Gold) and flips, you will also make money. But it is a vol bet not (entirely) a spot move bet. Also as vol goes up, the vega stays constant. I haven’t calculated for this option but say the position is long $1mm of vega – that means they make $1mm per vol move up (and lose $1 per down). Even if up 10 vols, 20 vols or 40 vols – still $1mm per vol. At least that is what I think the bet is.
Again this is all true for $3,500 options and $3,000 options. I will admit that options pricing is not my strength so I ask you. What type of actual move would increase the value of $1.75 million worth of $4,000 calls more than it would $1.75 million worth of $3,000 calls?
Most scenarios that feature increased volatility would favor the $3,000 calls with only very specific movements would favor a $4,000 strike even considering the extra leverage. This is why (in my post below) I believe the most straightforward explanation is a hedge against a specific economic outcome that would unravel an aggressive portfolio.
Ok, using just a rudimentary pricing calculator, at that price, given the current Jun2021 future as the price for basis, for every 1 vol move in volatility prices (which is what they trade in the options markets), the buyer would make $350k per vol. Vol goes up quicker than it goes down typically, they just need one big move or a war to cash in. It doesn’t matter that much where spot goes at this point.
Well it is most likely that the person placing the bet will lose. The quid pro quo is that if they win, they could win many multiples of their bet back. You dont have to win 50% of these bets to make money, just 10% of wins is likely to leave you with a healthy profit.
Of course we dont know the motives of this bet. Perhaps the entity taking it might stand to lose a huge amount if gold were to rise to this price for some reason and merely want to reduce that risk.
This isn’t about the Delta – which, you’re right, will not contribute much to profitability. It’s about Vega. Implied volatility. A violent move could make the option very profitable. Decay is the enemy as you say.
How does the seller of the call hedge their exposure, or do the stay naked?
Depends if they wanted the risk or not but I doubt it. The counterparty is probably an investment bank and they would lay off that risk in the options market but they would have a futures hedge while they unwound the position.
I can’t imagine the seller would want the risk. Unless of course its someone whose naturally long, and happy to stay that way. Maybe a central bank thats happy to stay long until exercised. I was just curious.
Another explanation is that someone with a substantial short position plans to cover, which will move the markets higher. While the market will move higher before they can completely liquidate that position, they will recoup some of that loss with profits on these calls.
Highly unlikely. For the calls to have even a remote chance of being profitable in the short-term the move higher would have to be huge – several hundred dollars – and accompanied by a very sharp increase in volatility.
When liquidating large positions (long or short) it is generally done as quietly as possible so as to have as little impact on the price as possible.
Wouldn’t buying well-out-of-the -money options on precious metals be a clever way to launder or transfer huge amounts of money?
Over, say, buying a Treasury bond and not risking any capital in the process? You’d still be subject to KYC checks for derivatives – especially in this size, which would be executed through a major IB.
This story about a “huge” bet on gold options reminds me of last week’s headline about Bridgewater’s billion $ futures short on the S&P. Yes, a Billion is a lot of money, but to Bridgewater it’s less than 1% of their total assets. It is likely they have 2-4% in many other investments, including large holdings in equities. The short is merely a prudent hedge. Also, Bridgewater can borrow basically at near-zero interest rates, so how much are they actually putting up? Maybe Bridgewater is the gold option player? If they believe their stock market hedge will pay off for them, then it stands to reason they may be foreseeing an “event” that will work for gold as well. Anyhow, food for thought.
“Also, Bridgewater can borrow basically at near-zero interest rates, so how much are they actually putting up? “
They probably aren’t borrowing. One puts up margin for futures.
On the large, pit-traded contract the maintenance margin is $31,500 per contract. At, say, SPX 3140 each contract is worth 3140 x $500 = $1.57 million. Approximately 637 contracts are worth $1 billion. So they would need maintenance margin of a little over $20 million.
And that’s assuming the margins that apply to you and me also apply to a large commercial / hedger. Even if they do, $20 million is not much to an outfit like Bridgewater.
Bah. $500 per point was what the large contract was back in the days I traded it. It is now $250 so the margin required would double and they would need a bit over $40 million. Still peanuts to a big outfit.
I have just eyeballed the numbers for the ES. It is 1/5 the size of the large contract and with maintenance margin of $6300, i.e., about 1/5 of the “bigs” it looks like it is a wash as to which contract they use.
Not pertinent but leverage for folks who do not carry positions overnight is allowed to be much higher. As someone who only daytrades the ES I have to post margin of $1000 / contract and I knew a guy back on the old Yahoo! message boards whose broker / FCM only required $500.
Agree.
It is interesting, the timescale of the price rise is very aggressive. If the Dow fell to say 20000 the Dow to gold ratio would be 5, where it’s been before?
link to longtermtrends.net
As Mish has pointed out, options that are this far out-of-the-money are always a long shot bet, and almost never pay off. But the sheer size of this one means that this is someone with VERY deep pockets – definitely a member of “The Big Club”. That’s what makes this interesting….
Fat finger or runaway algo or FED insider?
“…5,000 lots of a gold option…”
Each lot is 100 ounces.
Whoever did the buying is smart enough to have $1.75m to start with. He must also know something about options so not like some idiot inheriting or winning $1.75m and blowing it all. He probably has a lot more than $1.75m.
Doubt that gold will reach $4000 by June 2021 but all it takes for the buyer to make a decent profit is for gold to rise significantly within six months or so. Maybe it will. Or maybe the buyer is someone who knows a lot of things the rest of us don’t.
Why does everyone doubt that gold (which actually has intrinsic value) can reach $4,000 in the next 19 months when Bitcoin screamed to $19,000 in less time (and has arguably little or no value)?
Certainly a fundamental case can easily be made for gold to be worth substantially more than $4,000 today but the conditions are not yet right for this to occur. Right now confidence in the mighty US Dollar is sufficiently strong that gold is relegated to the shadows but its push higher in recent months indicates that this confidence is eroding.
Slowly, then suddenly ..
This isn’t really a bet that gold will hit 4000 in June of 2021- more like someone is expecting a violent move towards 2000 sometime soon. And it also could be a hedge for much bigger position buy that moves contrary to gold.
$4,000 is so far out of the money that a move to $2,000 might not change the bid on that option much.
Say it happens 4 months from now. Might get the bid back up to $3.50 or so due to time decay.
If a move to $2000 was expected “soon” say 3 months or less, there are far better ways to play than options so far out of the money that they will not react much.
It’s simply a weird bet to me
I have a question about this unlikely possibility. Lets assume it does hit that and its short-lived, how could someone holding the physical coins monetize this efficiently. I know you can sell the coins to a dealer and he will give you something less than spot as a premium. However, I envision dealers not wanting to buy at this price or charging a huge premium to buy physical gold. I don’t think the average coin shop can hedge their exposure. So, is there a way to hedge against your own holdings? The only thing I can think of is shorting the physical gold etf for the amount of physical gold you own?? Unwinding it after its sold, but it still doesn’t eliminate the loss on your sale from the premium the dealer would charge, which I am thinking would be huge if they are thinking its a massive price bubble. Or they just may refuse to buy outright at all.
If the price of Gold is $4,000 anytime wthin the next 18 months, it will be due to some “unforeseen” catastrophic financial event and you will be very glad that you have it – and not worrying about who to sell it to.
If gold hits whatever price ($2,000 $3000 $4000 $6000) there will always be buyers (and sellers) at or very near that price. Mathematically that must be.
GoldMoney, Bullion Vault, OUNZ all have small bid-ask spreads. Dealers have a bigger spreads. But one would always be able to sell reasonably near the current spot price.
True enough actually didn’t cross my mind even though it makes the most sense. Thanks, also Happy Thanksgiving.
Personally, I think of physical gold as an insurance policy, not an investment. Although it is nice when you have some and the price goes up, I also like when it goes down so I can buy more.
Thats my thought but if it goes up in a bubble I will sell it and hopefully allocate the money productively.