“Super Magnet” placed in gold call market

247Bull.com Editor: In order for the holder of the 10,546 call options to exercise them, gold would have to reach $2,100 in just over 12 months – equivalent to a 24.8% gain – and such a rise is by no means out of the question. In 2002 gold rose 24.9%, in 2007 it rose 31.4%, in 2009 it rose 24.5% and in 2010 it rose 29.6%. Whether or not gold reaches $2,100 by February next year, it is hard to argue with the favorable long-term fundamentals. 

One of my long time clients, who makes his living trading gold and silver, sees a “Super Magnet” being placed in the gold call market. Below is how he describes the recent action.

A ”Super Magnet” was placed yesterday with roughly 37,351 new Comex gold call options in the February 2014 option cycle.

10,546 calls were added at the $2,100 strike price, costing something like $24.20 per ounce, so one option contract would cost $2,420, or roughly $25,521,320 for this position.

8,250 calls were added at a newly created $2,300 strike price, costing something like $12.60 per ounce, so one option contract would cost $1,260 for a rough total of $10,395,000 for this position.

10,000 calls were added at a newly created $2,400 strike price, costing something like $9.60 per ounce, so one option contract would cost $960, for a rough total cost of $9,600,000 for this position.

5,000 calls were added at a newly created $2,700 strike price, costing something like $5.00 per ounce, with one option contract costing $500, for a rough total cost of $2,500,000 for this position.

2,625 calls were added at a newly created $2,780 strike price, costing something like $3.50 per ounce, so one option contract would cost $350, for a rough total cost of $918,750 dollars for this position.

So, the approximate grand total cost for this CALL OPTION loading into the February 2014 option cycle comes to $48,935,070.00. Let’s say $50 MILLION in round numbers.

With a total of 42,230 new call options added yesterday, of which 37,351 were added in the February 2014 option cycle, the total Comex call option open interest increased yesterday (January 15, 2013) by 6.14%! This was a huge increase by historical norms.

This call action could be a result of several pending new issues, one being the new dispute between the South African government with the mining industry. Another pending development is a fight over raising the debt ceiling. Additionally, in Europe there are ECB suggestions of currency devaluations, and the situation in Japan could very well be spooking the currency markets. Any and all of these developments might be yet another excuse to “buy option insurance” on gold.
The last time a “Super Magnet” was placed was back in July of 2012 when gold was bottoming out. That “Super Magnet” was done over several days. Yesterday’s action was far more dramatic.

The July 2012 “Super Magnet” was at strike prices far lower than those shown below and had the effect of pulling gold prices higher from the low 1500′s to just short of 1800, where a roadblock was built with a huge net call position in the December 2012 option cycle. If it wasn’t for that road block, I think gold would have gone a lot higher, perhaps over $1900 back in the fall.

Anyway, this “Super Magnet” possibly could put enough upside pressure on prices to finally get gold past the $1800 mark and perhaps to new highs. If the time frame holds true, the spike in prices should kick in sometime in early February and run perhaps through April or May 2013.

What will be interesting is to see if there are additional calls placed over the next several days.

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