This strategy is this is not a ‘slow drift higher’ type of strategy,” she said. “If GLD were to just drift higher, these options are going to decay away and they are not worth nearly as much. This is a strategy that you would typically use if you were protecting a short position—you are afraid of a huge pop to the upside—or you’re trying to look bullish and again looking for that pop to the upside. – Stacey Gilbert, Susquehanna Group (from CNBC article)
CNBC reported that a $5.9 call option bet was place on GLD 120-strike options which expire June 19. Including the $1.18 per call premium, the trader is betting that GLD will close above $121.18 on or before expiration. That’s a 5% jump in price by then.
For every dollar above $121.18 at expiration that GLD might close, the trader will make $50,000. However, if gold moves up 5-10% well before then, which is quite possible. The trader will make a lot more because the call options will “swell” up in value with volatility premium.
While the young lady from Susquehanna has suggested that this might be “hedge” against a short position in GLD, I think it would be more probable that a hedge play using publicly traded options would involve shorting near or out of the money puts. That’s what I would do, anyway, because shorting puts enables the hedger to take in cash upfront, rather than spend cash.
This is a speculative play by someone who has strong conviction that Fed will not raise rates at the June FOMC. But not only that, the trader is betting that the market will start to price in the probability that the Fed won’t raise rates at all this year. It’s also a sizeable bet that the dollar will tank.