Today, gold dropped, quiet a bit. The GLD ETF was down over 8% when I wrote this.
This is an image of the current quote and a peek at two options that expire Jan, 2015. I then looked to see how this would look if executed as a spread trade, i.e. to buy the lower priced call, and sell the higher, same number of contracts for each one.
The prices had already changed slightly, but the chart is a great way to look at this. The $170 call is bought for $4.75, and the $180 call sold for $3.15. Net cost, $1.60. Since a contract is for 100 shares of GLD, 10 contract spreads will cost $1600 plus commission.
If GLD closes at or above $180 by January, 2015, this trade will return $10,000. Put another way, the market is offering you a 6 to 1 bet against gold returning to its all time high in the next year and a half. I know the market has no personality, no emotion, but it seems to be answering the question, “will gold hit its old highs?” with a strong answer, “not bloody likely.”