Gold options point to $1,200

By Frank Tang - Analysis

NEW YORK (Reuters) - Heavy bets in deep out-of-the-money calls and other bullish plays in the gold options market indicate bullion has a shot at rallying to an all-time peak of $1,200 an ounce by the end of the year.

Gold has soared furiously -- a few years ago the metal was trading at $250 an ounce -- as investors poured into the market due to inflation fears, a weakened dollar and market turmoil.

"There are a lot of people who think that by the end of the year we'll be trading $1,200 to $1,500. They are not very expensive options, so people are buying them," said John Bilello, COMEX gold options floor trader.

Bilello said that many option investors were currently adjusting positions after gold's sharp fall but he saw recent strong volume of December $1,000 calls, bull call spreads between $1,200 and $1,300, and the selling of put options -- all of which are betting that gold will rise further.

A bull call spread involves buying a lower strike price call and selling a higher strike price call, and profits are maximized when prices rise above the higher strike price.

Option traders saw strong interest in the $1,200 December calls and other higher strike prices because they offered an affordable way for individuals to invest in gold's upside potential.

In addition, these out-of-the-money call options are priced sharply below those of the near-the-money ones -- a sign that the price volatility of gold will likely stay high in the near term.

An option is "out of the money" when the exercise price of a call -- which gives the buyer the right but not the obligation to buy gold futures -- exceeds the current price of the underlying gold contract.