LONDON, July 21 — A rush of activity in near-term Comex gold options after Monday morning’s dramatic price rout suggests investors are braced for the market sliding further to five-year lows below US$1,100 an ounce, Comex data showed.

The biggest change in open interest (OI), or the number of open contracts, on Monday in Comex gold options for this year was a 1,869 lot, or 10 per cent of the total, rise in OI in US$1,100 puts in the October contract, data showed.

That gives holders of those options the right, but not the obligation, to sell at US$1,100 an ounce, just below the current most active Comex gold futures price of US$1,106.04 an ounce. There were also increases in open interest in US$1,100 and US$1,000 puts in the September options contract.

In one day, open interest in 1,100 puts on contracts between August and the end of the year rose by 3,509 lots, or 350,900 ounces.

“The market expects gold to go lower, there is no doubt,” one options trader said. “All the technicals point to lower, the strong dollar, the US rate hike (view)... options activity is focused on lower strikes.”

Gold sold off sharply in the Asian trading session on Monday, extending declines posted on Friday in Europe and the United States after upbeat US data boosted the dollar and shored up expectations that the Federal Reserve is on track to raise US interest rates this year.

Futures prices crashed nearly US$50 an ounce in just 30 seconds, traders said, fuelling talk that heavy fund liquidation had triggered a wave of stop-loss selling on a break of key technical resistance at US$1,133 an ounce.

That took prices to their lowest in more than five years at US$1,088.05 an ounce, the 50 per cent retracement of gold’s long-term rally from 1999 to its 2011 record high.

“This has reinvigorated talk of the downside, which probably makes people a bit nervous,” Mitsui Precious Metals analyst David Jollie said. “So if you are long, you might choose to get some insurance.”

Investors holding long positions can use puts to limit their losses, allowing them to sell at a certain level if the value of the underlying asset falls further.

Bearish traders can profit from put options by buying in the belief that the price of the underlying asset will fall below the option strike, allowing them to close out that position by buying the asset at a discount to the put when it falls due. — Reuters