Lesson 6: Gold Options, Gamma and Big Strikes

Lesson 6 of 10 · about 8 minutes · course overview

Gold options are a large market on COMEX and over the counter. You do not need to trade them to benefit: knowing how option dealers hedge explains why price sometimes sticks to round numbers and sometimes accelerates through them.

Calls, puts and open interest

A call gives the right to buy at a strike price, a put the right to sell. Open interest by strike shows where positions are concentrated; big strikes are often round numbers such as $4,000. Exchanges publish this data; showing full strike-by-strike data on a public website needs a paid licence, which is why this site links to the exchange's own tools rather than reproducing it.

Delta and gamma in plain words

• Delta: how much an option's value changes for a $1 move in gold. Dealers who sell options hedge delta by trading futures.
• Gamma: how fast delta changes as price moves. It is largest for options with strikes near the current price and close to expiry.

Why dealer hedging moves price

If dealers are long gamma (they bought options), their hedging means selling into rallies and buying dips, which dampens moves and can "pin" price near a big strike into expiry. If they are short gamma (they sold options), they must buy as price rises and sell as it falls, which accelerates moves. Large expiries on and around option expiration days are therefore worth noting on your calendar.

Max pain and its limits

"Max pain" is the strike at which the most option value would expire worthless. It is popular online, but it is a crude summary: it ignores who is long or short, and gold's options are spread across exchange and OTC markets. Treat strike concentrations as possible magnets and accelerators, not targets.

Implied volatility, the price of all this optionality, is covered on the implied volatility page.