* Short-term gold options to exercise into futures
* Physical settlement aiming boost value of product
* Move to take market share from OTC gold options
(Adds CME comment, paragraphs 4-6; open interest, paragraph 11)
By Frank Tang
NEW YORK, June 18 CME Group (CME.O) is allowing investors in its short-term gold option contracts to take delivery of physical bullion in a bid to increase the product's appeal against over-the-counter gold options.
The biggest operator of U.S. futures exchanges said it will amend the contract of its weekly gold options to let investors exercise into futures contracts effective July 1, pending approval from the U.S. Commodity Futures Trading Commission, CME said in a notice late last week.
Prior to the change, the options, which were launched in July last year on CME's COMEX metals platform, were settled by cash only and physical delivery was not permitted.
“Based on customer demand, we made the decision to amend our Short-Term Gold option contract to a physically delivered contract," CME spokesman Chris Grams told Reuters.
"We believe this change will enhance the contract, making it even more competitive and will attract over-the-counter traders to the exchange,” he said.
Grams said that the CME has no plans to change other option products at this time.
Chicago-based CME is trying to make the options more attractive as some investors favor owning physical precious metals as a safe haven in market turbulence.
Last October, in a similar move to woo investors who favor physical metals, CME more than doubled the amount of physical gold it can accept from its clearing members as collateral. [ID:nN1E7921TW]
Dealers said that the CME was trying to gain market share from the over-the-counter market, which offers investors gold options with a wide array of expiration dates.
Each of the short-term options has a five-business-day expiration period, and the exchange rolls out a new option contract with a new date of expiry on a daily, continuous basis.
The one-year-old product currently has no open interest, CME said.
Anthony Neglia, president of Tower Trading and a COMEX gold options floor trader, said that market makers are reluctant to provide liquidity for the high-risk, short-term product, which has failed to garner interest from both institutional and retail investors.
"Statistically, 95 pct of the options go out worthless, so who’s going to take the first step" to trade them, Neglia said. He added there was some interest for the product among trading houses.
In a sharp contrast to the weekly options, open interest of CME's popular monthly COMEX gold options currently totals well over 1 million contracts, with more investors using options to bet on the upside in gold due to economic uncertainty.
(Editing by Alden Bentley)
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