Stocks quoted in this article:
After hitting a recent peak of $137.55 in late August, the SPDR Gold Trust (ETF) (NYSEARCA:GLD) has been in rapid decline, running into resistance at its 140-day moving average. Specifically, the shares have given up close to 8% in just over two weeks, and now find themselves hovering at $126.86. In yesterday's options pits, however, out-of-the-money calls were the flavor of the day, as the October 131 and 135 calls were the two most active options, with volume on each strike exceeding 39,000 contracts.
Much of that activity was fueled by a single trader, who simultaneously bought a 24,000-lot of the lower-strike call above the ask price for $2.28, and sold an identically sized lot at the higher strike for the bid price of $1.04, for a net debit of $1.24 ($2.28 minus $1.04) per pair of contracts. Overnight open interest at both strikes soared, suggesting the construction of an apparent long (or bull) call spread.
Based on the tactic employed, we can infer that the GLD trader anticipates modest upside for the shares over the next five weeks or so. In particular, the speculator needs the trust to muscle its way past $132.24 (the 131 strike price plus the initial net debit) by Oct. 18, when the back-month options expire. Past that breakeven point, the mildly bullish bettor will gain with every step north through the $135 level. This would result in the maximum potential gain of $2.76 -- the difference between strikes, minus the initial net debit -- per pair of options.
If the GLD shares ascend past the higher strike, however, the trader runs the risk of assignment, effectively capping his gains. Long story short, the bull call spread offers a lower cost of entry than a pure long call, but sacrifices the latter's unlimited upside potential. But no matter what happens, the most the speculator has on the line is the premium paid at initiation.
Option Briefs offer a concise look at recent notable trading activity. For more in-depth coverage of securities from an Expectational Analysis®
perspective, please visit our Trading Floor Blog section.