We saw more interesting options activity from big players in the GLD and UUP contracts today. These institutional traders are betting on a spike in the dollar and a potential 20% decline in gold prices.
GLD – SPDR Gold Trust ETF – A massive bearish butterfly spread on the gold ETF caught our eye today amidst a 0.50% decline in the value of its shares to $112.38. One medium-term pessimist, who is likely long shares of the underlying stock, established large-volume protective stance in the September contract. The investor purchased 20,000 puts at the September $90 strike for $1.50 apiece [wing 1], and bought 20,000 puts at the lower September $60 strike for an average premium of $0.19 each [wing 2]. The central September $75 strike housed the body of the butterfly comprised of 40,000 sold put options for a premium of $0.35 apiece. The net cost of the bearish play amounts to $0.99 per contract. Downside protection kicks in if shares of the GLD plummet 20.80% from the current price to the upper breakeven point at $89.01. The investor’s underlying position is protected in case the fund’s share price declines through the 52-week low on the fund of $78.87, down to a price of $75.00 each.
UUP – PowerShares DB US Dollar Bullish Fund – Dollar-bulls established call spreads on the UUP today, which is the Deutsche Bank Long US Dollar Futures Index, designed to replicate the performance of the greenback against a basket of currencies of its major trading partners. Shares of the fund slipped 0.25% lower during the session to $22.67. Call-spreaders purchased 20,000 calls at the June $23 strike for an average premium of $0.60 apiece, and sold 20,000 calls at the higher June $26 strike for $0.08 each. Investors paid an average net cost of $0.52 per contract for the debit spreads. Option traders are now positioned to accrue profits if the price per UUP share rallies 3.75% to breach the breakeven price of $23.52 by expiration in June. Maximum potential profits of $2.48 per contract are available to the investors if the index comes roaring back up to $26.00 per share. The UUP last settled above the strike price last Thursday and has only closed above $23 per share on 10 occasions since the start of December.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.