Jon Najarian, co-founder of trademonster.com spent almost three decades trading in the options trading pits. From that vantage point he gained a sense of how those on the front lines of market movements, the traders making incremental buys and sells, operate. It's a little bit of analysis, superstition, suspiciously proprietary information and the ability, or inability, to withstand risk.
In the attached video Jon explains from his perspective how the options markets are playing gold in light of the Federal Reserve's new Quantitative Easing Infinity program. We asked Jon to give us his thoughts directly in the below column.
The opinions are his own and not to be taken as advice or business solicitation. It's just one man's take, in his own words.
We've noticed large investments in SPDR Gold Shares ETF (GLD) and iShares Silver Trust ETF (SLV) over the past two months. After losing its luster from the end of February 2012 through the May 23rd low of $148.84, it wasn't surprising for us to see institutional buying return to the precious metal. Then we had Fed Chairman Bernanke announce QE Infinity post Jackson Hole and his two-day Fed meeting last week, and gold was off to the races.
The spike [GLD] from $167 per Bernanke announcement to $172 was nice, but a 3 percent rally isn't really going to get the gold bugs buzzing. However, we see massive buying of November 180, 185 and 200 calls, which portends a significantly greater rally, perhaps even a super spike for gold.
What's the catalyst? From my own gut instincts and from calls with our large institutional clients, I believe when the president does well in the polls, gold and its derivative plays, GLD, SLV, as well as the Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) all see more speculative buying of upside calls, and I believe this is in direct correlation to a belief that an Obama victory would produce a $100 or more super spike in Gold.
Thus, I think that watching volumes of the ETF itself as well as call volumes in the GLD are a far more accurate predictor of the world's opinion of how well the President is really doing rather than relying on polling data. This and the fact that hundreds of millions of dollars are traded/invested in GLD and its derivatives every day, versus tens of thousands of dollars spent on inTrade predictive markets.
But as we've seen in after the Bernanke QE infinity statement last Thursday, the President's post convention bounce has faded. That story is told very plainly in the GLD which has flat lined since last Thursday, September 13th.
It is interesting to note that the call buying (upside bets) at all three strikes, 180, 185 and 200 strikes significantly above the average open interest of any other call or put strikes in November.