The surge in gold prices triggers the "Doomsday Wheel" effect: multiple Shanghai gold options contracts skyrocket, with the maximum increase of 9800%!

Today, gold prices continued to soar, triggering the "Doomsday Wheel" effect in the options market.

As of the morning close, several deeply out-of-the-money call options on the Shanghai Gold Futures at the Shanghai Futures Exchange saw their prices skyrocket. Among them, the Shanghai Gold 2505 Call 888 had a maximum increase of 9800%, the Shanghai Gold 2505 Call 896 had a maximum increase of 7000%, and the Shanghai Gold 2505 Call 904 had a maximum increase of 5500%.

In addition, the Shanghai Gold 2505 call options with strike prices between 856 and 936 all saw increases of over 1000% in the morning.

Two Factors Driving the Surge

The sharp rise in several Shanghai Gold options in the morning session can be attributed to two main factors:

First, the aforementioned options are linked to the Shanghai Gold Futures, which surged in the morning session. As of the morning close, the Shanghai Gold 2505 contract rose by 4.24%, marking the largest single-day increase since April.

Gu Fengda, chief analyst at Guosen Futures, stated that recent global market risk aversion has significantly intensified, particularly due to deep concerns among investors regarding the independence of U.S. monetary policy, coupled with predictions from international investment banks like Goldman Sachs about the long-term depreciation of the U.S. dollar. This has provided dual premium support for gold, which serves as a core vehicle for "de-dollarization."

Second, the "Doomsday Wheel" effect in the options market has exacerbated the intraday volatility of the aforementioned options. According to the schedule, the expiration date for the Shanghai Gold 2505 options is April 24, with less than three trading days remaining.

Unlike stocks, the price fluctuations of options are not linear and are primarily influenced by intrinsic value and time value. The time value decreases gradually as the expiration date approaches, eventually reaching zero at expiration. Therefore, deeply out-of-the-money options close to expiration have the characteristic of extremely low premium costs. For example, the Shanghai Gold 2505 Call 888, which surged 9800% in the morning, had a minimum price of less than 0.1 yuan per contract in the previous night session.

This low cost gives options contracts a very high leverage effect, where a 1% increase in gold prices could lead to price increases of 50%, 100%, or even more for the options. This leverage effect attracts many investors looking to achieve high returns with small amounts of capital. As the expiration date approaches, significant fluctuations in the underlying asset's price often trigger dramatic changes in the prices of related options, which is commonly referred to in the industry as the "Doomsday Wheel" market.

Risks Cannot Be Ignored

However, it must be emphasized that although some options have seen significant gains today, there are still many risks in actual trading. Especially for ordinary individual investors, entering the market rashly without a thorough understanding of the relevant trading rules of options poses great risks.

The key risk point is that if the gold price does not break the strike price before expiration, the out-of-the-money contracts will expire worthless due to the depletion of time value. Therefore, the out-of-the-money options that have seen dozens of times gains today carry the risk of "going to zero" in value.

Taking the Shanghai Gold 2505 Call 888 contract as an example, if the corresponding gold futures 2505 contract price does not reach 888 yuan/gram (as of today's closing price of 832.72 yuan/gram) within less than 3 days before expiration, then investors holding this option will lose all their premiums.

In addition, the risks associated with the "doomsday wheel" market also include volatility decline risk, liquidity exhaustion risk, and so on.

Industry insiders indicate that compared to stocks or futures, options are a nonlinear derivative. At the time of option expiration, the buyer of an in-the-money option can exercise their rights, while the value of an out-of-the-money option will go to zero. This reminds investors that when buying near-expiration out-of-the-money options, they should manage their positions well and pay attention to profit-taking and stop-loss issues; otherwise, the liquidity risks and market fluctuations could lead to profit erosion or even significant losses.

Wang Xiang, chief consultant of Huarong Rongda Futures Options, told reporters that the "doomsday wheel" market does not occur every time a contract expires; on the contrary, its probability is very low, and there is a low win rate in trading. "The characteristics of the doomsday wheel market are low win rates and high risks, so profit-taking is key in doomsday wheel trading. If profit-taking is not timely, the final price of out-of-the-money options will go to zero."

Author of this article: Fei Tianyuan, Source: Shanghai Securities Journal, Original title: "Gold Price Triggers a Spectacle! 9800%"

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at their own risk