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A sudden surge in demand for gold options cashable at over $1,000 an ounce is the clearest sign to date that hedge funds and savvy traders are betting on a big rise in bullion prices. UBS said investors had begun to show keen interest in "call" options to expire in December with strike prices of $1,000 an ounce and above. The bank said buyers had even emerged for options dated late 2007 with a strike price of $2,500. John Reade, the bank's precious metals strategist, said: "Clearly some options traders are positioning themselves for very large moves higher." The prices are far above gold's all-time high of $850 at the height of the oil and inflation crisis in 1980. Gold closed yesterday at $653. Buying a call option gives investors the right to buy a quantity of metal (or shares or other instrument) at a fixed price, on a set date. If the price falls short, the option expires worthless. If it shoots above the strike level, traders can make huge multiples on their stake. "Put" options act in reverse, gambling on a price fall. Mr Reade said: "They're like lottery tickets. You lose most of the time, but when you win, you can win big." The December 2006 call option with a strike price of 1,000 last traded at $3.60. This means a bet of $3.60 could net $100 if gold reaches $1,100 an ounce by December, or $200 if it reaches $1,200, and so on. Comment: So, if one were to bet, say $3,600 on $1000 Dec gold call options and gold hits $1100 by December, one would make $100,000, if $1,200 then $200,000. -EJ | ||||
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