Mystery Buyer Makes Huge Options Bet on Gold Hitting $4000

-edited

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 lose 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

Comments (40)
No. 1-18
hmk
hmk

I have a question about this unlikely possibility. Lets assume it does hit that and its short-lived, how could someone holding the physical coins monetize this efficiently. I know you can sell the coins to a dealer and he will give you something less than spot as a premium. However, I envision dealers not wanting to buy at this price or charging a huge premium to buy physical gold. I don't think the average coin shop can hedge their exposure. So, is there a way to hedge against your own holdings? The only thing I can think of is shorting the physical gold etf for the amount of physical gold you own?? Unwinding it after its sold, but it still doesn't eliminate the loss on your sale from the premium the dealer would charge, which I am thinking would be huge if they are thinking its a massive price bubble. Or they just may refuse to buy outright at all.

Yancey_Ward
Yancey_Ward

This isn't really a bet that gold will hit 4000 in June of 2021- more like someone is expecting a violent move towards 2000 sometime soon. And it also could be a hedge for much bigger position buy that moves contrary to gold.

wootendw
wootendw

"...5,000 lots of a gold option..."

Each lot is 100 ounces.

Whoever did the buying is smart enough to have $1.75m to start with. He must also know something about options so not like some idiot inheriting or winning $1.75m and blowing it all. He probably has a lot more than $1.75m.

Doubt that gold will reach $4000 by June 2021 but all it takes for the buyer to make a decent profit is for gold to rise significantly within six months or so. Maybe it will. Or maybe the buyer is someone who knows a lot of things the rest of us don't.

Maximus_Minimus
Maximus_Minimus

Fat finger or runaway algo or FED insider?

Bam_Man
Bam_Man

As Mish has pointed out, options that are this far out-of-the-money are always a long shot bet, and almost never pay off. But the sheer size of this one means that this is someone with VERY deep pockets - definitely a member of "The Big Club". That's what makes this interesting....

Scooot
Scooot

It is interesting, the timescale of the price rise is very aggressive. If the Dow fell to say 20000 the Dow to gold ratio would be 5, where it’s been before? https://www.longtermtrends.net/dow-gold-ratio/

Irondoor
Irondoor

This story about a “huge” bet on gold options reminds me of last week’s headline about Bridgewater’s billion $ futures short on the S&P. Yes, a Billion is a lot of money, but to Bridgewater it’s less than 1% of their total assets. It is likely they have 2-4% in many other investments, including large holdings in equities. The short is merely a prudent hedge. Also, Bridgewater can borrow basically at near-zero interest rates, so how much are they actually putting up? Maybe Bridgewater is the gold option player? If they believe their stock market hedge will pay off for them, then it stands to reason they may be foreseeing an “event” that will work for gold as well. Anyhow, food for thought.

Six000mileyear
Six000mileyear

Wouldn't buying well-out-of-the -money options on precious metals be a clever way to launder or transfer huge amounts of money?

Carl_R
Carl_R

Another explanation is that someone with a substantial short position plans to cover, which will move the markets higher. While the market will move higher before they can completely liquidate that position, they will recoup some of that loss with profits on these calls.

Scooot
Scooot

How does the seller of the call hedge their exposure, or do the stay naked?

TheLege
TheLege

This isn't about the Delta - which, you're right, will not contribute much to profitability. It's about Vega. Implied volatility. A violent move could make the option very profitable. Decay is the enemy as you say.

leicestersq
leicestersq

Well it is most likely that the person placing the bet will lose. The quid pro quo is that if they win, they could win many multiples of their bet back. You dont have to win 50% of these bets to make money, just 10% of wins is likely to leave you with a healthy profit.

Of course we dont know the motives of this bet. Perhaps the entity taking it might stand to lose a huge amount if gold were to rise to this price for some reason and merely want to reduce that risk.

Axiom7
Axiom7

This is not a bet on Gold hitting that level, it is about kappa (vega) and also the gold basis. Remember that in-the-money-ness of an option is the FORWARD versus the Strike price. So if there was a crisis and gold jumped up possibly also the gold basis would move up so that the FORWARD price move would be greater than the spot price and with the increase vol the trader would make a huge profit. This is not at all a bet on the price of gold at expiry. This trade loses if the markets keep calm for 6 months.

get
get
  • 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 lose some but not all of the bet.

If these are standard call options then the price of those options will increase substantially even if the price of gold only goes to 3,000. The buyer can sell those options at any time before expiry at whatever price they're trading at and if the price of gold is at $3000 - for example - the price of those options will rise above the initial purchase price assuming there is a reasonable amount of time value left on them.

Am I missing something here?

mrutkaus
mrutkaus

Catherine Austin Fitts had a video on the 27th saying something like this is the first time in a decade she's predicting the dollar will weaken.

baconbacon
baconbacon

There is a very straightforward explanation for this type of a bet. June 2021 is 20 months away, and gold would need a 175% price increase to hit 4,000 and those types of moves aren't even close to recent history. The 20 months before gold hit 1,900 only showed ~75% increase, and to get a 275% increase to 1900 you need to have bought in late 2007, making it a 4 year run up. The only time you have gotten a run up of that speed and magnitude is the late 1970s, so basically this should be viewed as a bet that will only pay out in a high inflationary environment. Now this would be an extremely risky bet to make that the next 20 months is going to be inflationary enough to drive that price move so this can only be seen as a large hedge (or a boneheaded bet, which isn't a smart assumption). The structure that fits best would be someone or group who is positioning themselves for a large deflationary environment/crisis on the order of the GFC or larger with positions being put based on large price drops, with a major fear being that CBs actually unleash inflation in attempting to fight it, causing real losses, but not the nominal ones they are set up for.

The newbie
The newbie

This guy is a genius!!! We are upon something that we don't know anything about! In the near future the world may experience the worst recession since late 1800's In that case, this guys makes some good money while everyone is going down He'll be king of the hill And if the doomsday doesn't happen, he'll keep on making money with the rest of his portfolio (and I'm sure as hell this guy is loaded!!!) Remember when Michael Burry made a bet against housing and it turned out to be a bet against world's economy?! He made 500% profit the day we began losing everything! If I had 20 million dollors, I would have done the same! But for now, I'll be selling gold next week at around 1500 USD :) This trade talks are a gold mine

leicestersq
leicestersq

Gold is up over 1% today.

That cant be too bad for his option. Is there a place where we can see the price of the option on the internet, I dont have a clue where to look?