Gold rout triggers rush to buy puts against downside risks

NEW YORK (Reuters) - Gold's choppy slide to below $1,200 an ounce after several sharp pullbacks has prompted nervous investors to buy put options to hedge against further losses.

After bullion sank below the $1,200 mark for the first time since August 2010 on Thursday, traders in droves added puts that are out of the money, referring to puts with strike prices below that of current gold prices or calls with strikes above spot.

On Thursday, the Comex August $900 puts changed hands 2,500 times, by far the most heavily traded put strike accounting for almost a quarter of all of August put volume.

"Some people are scrambling for protection as the longs do not want to meet further margin calls and prefer to buy some insurance," said Steven Slovak, director at Knight Capital Group.

The August $900 puts also saw open interest up around 1,400 lots to 2,700 on Thursday, nearly double that of the previous session. (Graphic: http://link.reuters.com/gej39t)

Another heavily traded put strike was $1,170, whose open interest surged by about six times to about 1,650 lots on Thursday from just 230 on Wednesday.

"Some are selling puts and buying calls with the thinking that $1,180 could mark a bottom, at least a short-term one," Slovak said.

On Friday, gold rebounded nearly 2 percent from a low of $1,180 an ounce after a sudden rally driven by short covering and end-of-quarter book squaring.

The U.S. Comex gold contract for August delivery last traded at $1,214 an ounce in very choppy trade.

In August calls, the most notable spike was seen with the $1,450 strike with turnover of about 3,400 lots and open interest up nearly 50 percent to 8,000 lots, suggesting some investors are using cheap, deep out-of-the-money calls to catch the upside in gold.

(Reporting by Frank Tang, Graphic by Jan Harvey in London; Editing by Chris Reese)