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Gold Seen Drifting Toward $1,300/Oz Ahead Of Approaching Options Expiration

By Allen Sykora Kitco News
Wednesday July 23, 2014 2:01 AM

(Kitco News) - Comex August gold futures may gravitate toward the $1,300-an-ounce level into an options expiration at the start of next week, assuming no major news events emerge to suddenly send prices sharply in either direction, traders and analysts said.

Expiration of August options for gold and silver are scheduled for Monday.

A call option gives the holder the right to call, or buy, a specific futures contract at an agreed-upon price during the life of the option. A put gives the holder the right to sell a specific futures contract at an agreed-upon price. Jockeying ahead of these expirations often impacts prices in the short term and can add to volatility.

Preliminary CME Group data through Tuesday show that the number of open positions for puts in August gold options was 109,099. Open interest in calls was 192,969.

“I think there is a pretty big magnet right around that $1,300 level,” said James Ramelli, trader with KeeneOnTheMarket.com, which focuses on options. He cited large open interest here, with 9,519 puts and 7,326 calls at $1,300.

No major U.S. macroeconomic releases are scheduled ahead of the expiration, Ramelli pointed out.

“So I don’t really see big catalysts,” he said. “So we’ll probably sit around this level or drift closer to that $1,300 strike.”

August gold has traded just above $1,300 so far Wednesday, with a settlement of $1,304.70 following the close of the pit session.

Markets often have “pins” to certain price points ahead of an options expiration, Ramelli explained.

“It happens in equities, it happens in equity futures and other commodities as well,” he said. “It’s a concept known as pinning, with market mechanics driving the underlying to those levels.”

This doesn’t necessarily mean gold will be right at $1,300 at expiration, he continued.

“But generally speaking, if we’re trading around that region going into expiration, that’s where it will tend to drift to,” Ramelli said. “People are looking to buy it at $1,300 and to sell around $1,300 to cover their (options) contracts, should they get exercised. Below $1,300, the people who are long those puts have to buy gold futures. Above $1,300, the people who are long those calls have to sell gold futures. So it kind of balances out and it tends to drift toward that strike.”

Still, if a major news event breaks or significant chart point is breached to trigger buy or sell stops, the futures in any commodity market likely would make a move irrespective of what options positioning might otherwise imply.

Sterling Smith, futures specialist with Citi Institutional Client Group, also cited $1,300 as the major area of interest in the options market. He noted there are more puts than calls at this strike price.

“That may allow for at least a little bit of upside action in the gold market,” he explained.

Puts are normally hedged by professional traders with short positions in the futures, he explained. So if these traders opt to buy back their puts, they would also buy in the futures, creating upside pressure.

“That will result in some degree of upward mobility for the market,” Smiths said. “It doesn’t necessarily have to be long-lasting. We could have a one-day spike where the market moves up $15.”

However, he added, there could be some additional volatility now that the largest open interest for the futures lies in the December contract, which has a triangle pattern with downside potential.

“Putting this all together, I see a market may be stuck a little bit in neutral,” Smith added.

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Smith and Ramelli said they do not anticipate much influence on the price action in the broader silver market from the expiration of options. Nevertheless, the $20 strike price may be the most significant for silver, Smith added.

The open interest in August silver options is much smaller than in gold, especially since August is never a most-active month for silver futures, as most-active status jumps from July to September during the rollover. Open interest in August puts was 11,218 and open interest for calls was 9,438.

“It’s not enough to really cause a lot of influence,” Smith said. “The open interest is really pretty small and about even. This would tend to be about neutral.”

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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