How a Gold Bug Played the Fed for a $1.1 Million Profit

One options trader accurately predicted gold's upside move and scooped up a million-dollar profit

Mar 16, 2017 at 3:06 PM
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Even though Wednesday's Fed decision to raise interest rates was widely expected by the Street, there was still plenty of movement in the equity market, and beyond. Gold prices, for instance, shot higher in after-hours trading after the Fed's decision, thus lifting the VanEck Vectors Gold Miners ETF (GDX). The exchange-traded fund (ETF) was trading near $21.81 right around 2 p.m., and then jumped higher to close at $22.98 after the Fed raised rates -- a 5.4% intraday move. Interestingly, this move delivered impressive gains for one GDX options trader.

GDX has been a popular target of options traders in recent weeks, with calls accounting for the top five most accumulated contracts in the past 10 sessions. According to Trade-Alert, one trader bought to open almost 20,000 March 22 calls for 25 cents each -- an initial outlay of $500,000 (number of contracts * 100 shares per contract * price paid per contract). After the Fed decision hit, a similar block of the March 22 calls was possibly sold to close for 84 cents, or $1.68 million. If this was the same trader closing his trade, he would have cashed out with a single-day profit nearing $1.1 million. 

However, while that trader may have cashed in on the post-Fed bump, GDX could remain relatively range-bound in the short term. VanEck Vectors Gold Miners ETF is up almost 9% year-to-date to trade at $22.74, but the shares' breakout attempt earlier this year was promptly cut short by the $25 level, and the $23 area represents a 10% year-to-date gain, which could serve as an added speed bump. On the flip side, the round-number $20 level or GDX's annual low of $18.58 from December could be supportive in the wake of a sell-off.

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