Monday, May 23, 2011

Trade of the Day: GLD buyer of June $145/$140 put spreads

The Trade:
A trader bought 20,000 June $145/$140 put spreads at $1.

A trader is making a large bearish bet on GLD. The trader is paying $2,000,000 to execute the spread and chose to use the June expiration instead of a back month. Therefore, time is not on the trader's side. The break even price for the bearish spread is $144. GLD closed trading today at $147.83. Therefore, the trader needs to GLD to drop, sooner rather than later. The max risk for the trader's bet is the debit. The max profit potential is $8,000,000 which occurs at an underlying stock price of $140 or below by June expiration. Therefore, the risk/reward ratio is a favorable 1:4.

The chart shown above is the GLD daily stock chart. The white line shown is the break even price. You can see that the break even price has shown to be a level of support in the past. GLD has traded below the $144 level twice but quickly popped right back above the break even line.

GLD traded 206,523 contracts today compared to average daily volume of 269,640. The 52-week range for GLD is a low of $113.08 and a high of $153.61.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.


  1. when thinking of placing a trade how do you determine if this is a hedge or not? This person could very well be long more then 2 million in the GLD and could be using this to hedge. Any thoughts?

  2. That's the toughest part and really experience comes into play here a lot. There really isn't a way to know 100% for sure. Reading option flow is more of an art than a science but if you like the set up and use proper risk management you ought to be fine... hope that helps. feel free to ask more questions and if you want to dig deeper just let me know