I don't know much about options, but I found this intriguing enough to post here:
Message 20444266
Here is reason why gold is down today
by: trueshebear2003
Long-Term Sentiment: Strong Buy 08/24/04 01:24 pm
Msg: 996 of 1005
It's sure caused a lot of commentary lately about the surprising move in gold. It seems no one gets it. The options tail wags the yellow dog on the COMEX. If you have a look at the NYMEX website you will see a surprising set of data for September 2004, there are options at strikes ranging from 380 to 440 that total 39,700 contracts. The actual open interest in this delivery is only 21 contracts. In other words, there will need to be some short selling in that contract to take place unless gold drops below 385 by expiry. There are two more days to expiry, it's August 26th. Therefore, expect heavy downward pressure on gold today and tomorrow. It is incumbent on the longs to keep buying the next few days or they will see their profits collapse.
On the other hand, we have the makings of a post-expiry short squeeze of noticable proportions if the buyers continue to support the market the next two days. Right now the total of in the money options is 10,494. These are naked shorts folks, if whomever sold those contracts cant break the front month down by selling in December, then they are going to be forced to purchase 1mm oz on the spot market or have their CB buddies pony up about 16 tonnes of gold for this expiry.
The shorts may have created some real problems here because I don't see any easy way out of being forced to either deliver 1mm oz of gold or buy it on the spot. Now who has 1mm oz of gold just laying around for delivery right now? The COMEX depositories currently list 3.5mm oz registered so this represents a third of the COMEX stock. That's pretty risky. If gold manages to run higher, i.e. jump back to 410 in the next couple of days, the total rises another 1942 contracts. If it can crack $420 by Thursday, there is another 10,221 contracts or 1mm oz.
We have seen the hedge funds go after the shorts in the past with success i.e. Dec 2002 and Sep/Dec 2003. Lately though, the hedgies/spec longs have been slapped down. However, with oil easing from it's highs, there is room for profit taking there and hedge funds could easily shift money from oil to gold and catch the gold commercial shorts without the ability to pour it on in the next couple of days. If we get past this expiry with gold over 420, we could see a huge spike in spot which might be sustained through the end of the year because there are lots of options and contracts sold for the October and December months as well.
I don't know how it will play out but the watchword is volatile. I think you could do well buying some Dec. gold here with a downside $395 risk but an upside $440 target. I don't buy futures however so my advice is pure speculation. I will wait until after this expiry to buy anymore physical and practically speaking, I would be rooting for the shorts to win this one. So for coin buyers, I would step aside until Friday and of course if it pops big, you will have to bide your time until mid september.............. |
