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November 28, 2019 | Mystery Buyer Makes Huge Options Bet on Gold Hitting $4000

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
An unknown person or hedge fund bought 5,000 options on gold hitting $4,000 an ounce by June 2021.

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 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

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November 28th, 2019

Posted In: Mish Talk

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