Gold Options Traders Bet Big on More Upside as Skew Shifts

Gold prices have seen an impressive recovery in August, gaining over 8% so far this month and climbing back above the $4,300 level. This resurgence follows a dismal stretch from March to June, during which gold closed in the red for four consecutive months, wiping out its gains for the year.

According to Chris Murphy, co-head of derivatives strategy at Susquehanna, the options market has undergone a significant shift as well. Skew, a measure of the relative cost of puts versus calls, has flipped from downside protection to upside participation. This is a stark contrast to the summer setup when put protection was relatively richer.

The shift in skew has already shown up in recent flow, with traders increasingly buying gold upside rather than downside cover. A notable example is the purchase of 8,000 November 460 calls on the SPDR Gold Trust at roughly $5.55, which left it about 13% above the market.

While hedging has not disappeared entirely, the trend suggests that investors are becoming more optimistic about gold's prospects. However, whether this optimism is justified remains to be seen, and the upcoming Fed meetings will likely play a crucial role in determining the fate of these upside bets.