Gold Forecast: Open Deep OTM Calls Rise, Investors Preparing For Fed-led Risk-off?

The preliminary data for Gold's October expiry options shows a huge jump in the open positions in deep-out-of-the-money call options.

PCR-OI change says bullish trend reversal is on the cards

Open positions in Calls jumped by 14,371 contracts and the open positions in Put options rose by 4102 contracts. The PCR — OI (open interest or open positions) change is 0.28. A reading below 1 indicates investors are buying calls (bullish bets). A low PCR-OI change at the bottom of the (current) sell-off indicates the investors are expecting a bullish trend reversal.

Max additions are seen in deep out of the money [OTM] calls

Source: CME

• $1335 Call added 7980 contracts on Wednesday, while $1375 Call added 4987 contracts.

Deep OTM calls are cheap, thus a big jump in the open interest in the deep OTM calls indicates that investors are buying cheap insurance against a potential spike in the yellow metal.

Total Open Positions

• Max open positions are seen in $1335 Call and $1375 Call and $1250 Put

Are investors prepping for Fed-led risk-off?

The reflation story is back on investors' radar, so the USD is ruling the roost. The Fed is hell-bent on unwinding its ultra-easy monetary policy and investors have also realized that North Korea, despite all the rhetoric, isn't likely to start a war with the US.

So what's behind the sharp rise in the open positions in the deep OTM calls? As discussed here, investors are yet to price-in Fed's reverse QE. The textbook says Gold price cheers balance sheet expansion, and vice versa.

However, the balance sheet expansion never led to real economic inflation and only ended up boosting asset prices. Thus, unwinding of the balance sheet should lead to asset price deflation (risk-off in equities), in which case Gold stands to gain.

The sharp rise in the open positions in Gold October expiry deep OTM calls could be due to investors anticipating a Fed-led correction in the stock market.

Technicals - Potential bullish divergence

Daily chart

• A positive close today would confirm bullish price-Stochastic divergence, in which case the metal could revisit $1300 levels.
• The 5-DMA and the 10-DMA are sloping downwards, thus gains are likely to be capped around $1300-1310 levels.
• In the short-run, the yellow metal is likely to establish a range of $1280-$1310.