Why March 28th Does(not) Matter for Gold- Option Analysis

Gold

Tape Watching

So far gold has acted well as Euro Zone elections, Brexit, political worries and better demand in India has supported bids.

Today more (3)FED speak, ahead of option expiration may hold back traders again.
Gold-silver ratio 70.85, gold-plat281.80, plat-palladium at 163.65.
Platinum had nice move but palladium was the star.
Gold spread roll over April-June, more June done over April so 300 value while June-August is now 320 bid.- suggests some spec longs are rolling into August from April.

interactive chart HERE

Option Facts Right Now

Gold Options are handicapping that Gold will be within $11.00 of $1250 on expiration day.- If OI were very large, we'd say much smaller range
Open Interest at the strike is less than $10k. This is not a lot 7k calls and 2k puts approximately. CME source
Values are lower today, suggesting long option players are selling
Calls or puts do not matter directionally and can be bullish or bearish depending on who has the position.
50% of OI traded yesterday. Best bet is these were liquidating trades
If OI shrinks again, the gravitational pull is less a factor.

Options Exert Short Term Force on Gold

There has been a lot of talk about this week's option expiration as being important. Some have even implied that 'after expiration the market will rise' . We're here to tell you what matters on this stuff in simple terms.

When do Pins Happen?

the bigger the OI at a strike, the larger the "tug- of- war"
as a guide, round strikes have larger OI, and months with 60 days between them have more. April is 2 months after Feb. March options are a serial month and generally do not have large OI. December is usually the largest in Gold OI for multiple reasons.
markets in general and Gold especially have a history of "pinning" the nearest large OI strike in the final week of expiration

Why They Occur

the option longs are generally fragmented and undercapitalized- small prop trading firms, marketmakers, and retail specs
the option shorts are generally deeper pockets and concentrated- hedge funds, Banks, and producers
like in Texas Hold-em: the deeper pockets can afford to wait out the river card
the usual result given these circumstances is decreased volatility for the expiration week- but if the strike's gravitational pull is broken, it could be enormous.

After a Pin

if a strike is pinned, the market has a higher chance of an exaggerated move on lighter than normal volume afterwards
this move could snowball into a large move on heavy volume
the direction is by no means related to what the market has done pre expiration week
it is frequently an inflection point. And from there, the market does make up its mind to reverse OR continue trends.
sometimes that is the top of a market. After options expire, small non-commercial future longs peel profits first. Longs declare their intent or get out first.
sometimes the market rallies post pin because those expired long options that caused the pin are no longer selling futures keeping a lid on a rally. The converse is also true.

Traders are awaiting next Tuesday March 28 option expiration on Comex

where possible 200 thousand positions will be abandoned, as only those in the money become futures contracts the next day.- could be bullish, could be bearish. need ot know who is losing positions.
We are at 1,153,181, probably decline after that to under 1million somewhat.
Many are calls over 1260 are and puts below 1200.Futures 461270, up from 410K area first week of February.- implies new option activity in July 2017 and April 2018 options by producers post expiration. Hedges roll off, and need to be replaced.

h/t George Gero who is all over this stuff daily. We like Ross Norman's article here.

Just remember this. Post option expiration there is futures expiration. And that means noncommercial longs are first to decide to recommit to market or get out. adn that means longs will either sell next week, or roll over in June. So the higher April/ June goes, the more funds are re-committing to their position. And even after that is done, they may liquidate as new producer hedging comes in. There is always something that can be a driver that distorts prices temporarily. investors should not care. Opportunistic traders lke us should

The only thing you can bank on right now is this:

Every spec long is assessing if he should sell or roll right now. And they often move in herds.

Anatomy of a Pin

Large open interest can act as a magnet even when unmanipulated as professionals sell futures above $1250 and buy below $1250. This temporarily reduces ranges and volatility. It is referred to as "pinning a strike". But, for every long there is a short, so why does this matter in a sum zero game? Because, the short options players typically have deeper pockets than the longs who are selling above and buying below.

Short Option Players are Typically Stronger

They are less worried about losses than smaller professionals. They should be buying hi and selling low. But they do not usually. Instead they rely on the guy with the "smaller stack" (the long option guy) to fold. And he always does.

Recipe for Manipulation

And you can see how that lends itself to manipulation as well. Options are used to manipulate futures for 20 years and should be included in the lawsuits outstanding. We believe they will be at some point. We can personally add to the testimony and have done so already in an energy case.