Gold Bugs Back in Fashion as Indices and Stocks Jump

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The gold bugs were biting again today, shaking off yesterday's big rally to capitalize on continuing uncertainty in the market and stake out some new options positions, traders said.

The options action in the gold sector was scattered over the big names today, traders said, as volume in

Homestake Mining

(HM)

,

Newmont Mining

(NEM) - Get Report

,

American Barrick Gold

(ABX)

and

Getchell Gold

(GGO) - Get Report

surpassed typical levels. A large order also hit the

Philadelphia Stock Exchange Gold and Silver Index

, which has risen almost 42 percent to 69.29 between Aug. 31 and yesterday. Today, it added another 5 points by midday to hit 74.35.

Joe Sunderman, of

Schaeffer's Investment Research

, said the options research shop had recently turned bullish on gold stocks and was holding positions in American Barrick. "The sector has dramatically turned around, and it's shown impressive relative strength," he said. "People were concerned about the size of any potential rate cut and the impact of inflation, and gold bugs are always ready to put their money into the options."

The big trade in the Philly's Gold and Silver Index accounted for more than 1,000 October 70 calls, against open interest of just 552 contracts. That in-the-money move sent the price of the contract up 3 ($300) to 6 1/2 ($650).

Newmont and Homestake options saw call trading pick up today, as well. Newmont shares were up 1 13/16 to 22 7/16 and the October and December 20 calls traded heavily with the December contract posting volume of 842 in an apparent covered call write against a purchase of the underlying shares.

Homestake was up just 5/8 to 11 13/16 at midday but call buyers thought the company was worth a shot. The October 12 1/2 calls traded 223 contracts, the January 12 1/2 traded 160 contracts and the January 15 calls posted volume of 270 contracts.

At New York brokerage

R.F. Lafferty

, options head Jay Shartsis was similarly optimistic on gold stocks' prospects. "I think they have begun a multi-year bull market for gold," Shartsis said. "It's the only real money."

The uncertainty in the equity and currency markets has contributed to investors' appetites for gold, traders said. The

Chicago Board Options Exchange Volatility Index

slid 15% to 31.53 on Wednesday after three weeks of being near or over 40. The VIX, a major fear indicator, took back about half of what it lost yesterday, jumping 7.4% to 33.87. The higher the VIX, which reflects fear via trading in near-the-money S&P 100 options, the more uncertainty is present in the market.

Net stock options continued to swagger through the market, even with the

Dow

struggling today.

America Online

(AOL)

was up 1 9/16 to 116 13/16. Its options followed dutifully, with the October 120 calls running up volume of 3,344. The contract, just one point out-of-the-money, was trading up 1 1/8 ($112.50) to 5 5/8 ($562.50).

Yahoo!

(YHOO)

options also were trading at astronomical prices. With its shares up 1 3/16 to 119 1/16, a play in Yahoo October 120 options -- less than $1 out-of-the-money, cost 10 1/2 ($1,050), a 1 5/8 ($162.50) rise over yesterday's premium. "You don't know what to think about these companies," Shartsis cracked.