Photographer: Daniel Acker/Bloomberg

`Lotto Tickets' for 1.5 Million Ounces of Gold Trade in Options

Fund managers have often used gold as an insurance, but how about a lottery ticket?

On Friday, when Russian legislators said North Korea was preparing for a nuclear test that could reach the U.S. West Coast, transactions were posted for the purchase of calls that give the holders the right to buy more than 1.5 million ounces of gold for delivery in December 2018 for $3,000 an ounce. That’s a wager that prices will move higher than the $1,923.70 record set in 2011. 

“This is the buying and selling of a lottery ticket,” Tai Wong, the New York-based head of base and precious metals trading at BMO Capital Markets, said in a telephone interview. “Most market makers will typically not want to sell options like this because your upside is limited to just the premium but you’re exposed to massive liability if something unimaginable happens.”

At 11:35 a.m. on Friday, 15,000 lots of the December 2018 gold calls were traded. Another 7,500 lots for $2,600 calls and 7,500 lots for $2,000 calls changed hands at the same time, making up the three-most heavily traded bullion options that day, according to exchange data compiled by Bloomberg. Each lot involves 100 ounces of gold.

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