Name That Trade $GDX – Gold Sloggers

by Enis May 20, 2013 3:28 pm • Commentary

The gold miners have had a miraculous fall from grace in the past 2 years.  Here is the chart of the GDX ETF over the past 5 years, illustrating the speedy run-up and even more rapid descent:

5 year weekly chart of GDX, Courtesy of Bloomberg
5 year weekly chart of GDX, Courtesy of Bloomberg

The gold miners as a group have been the epitome of corporate mismanagement.  Many of the companies took off their hedging program in 2010 or 2011 (with long-time sector stalwarts like ABX and GG even throwing caution to the wind), right near the highs of the precious metal market.  Meanwhile, the miners became more levered, taking on increasing debt to undertake new mining projects, with the expectation that ever-increasing gold and silver prices would support projects that had much higher breakeven rates (above $1000/oz in gold in most cases) than in the past.  Some amazing actions considering that gold had already gone up 12 straight years, from 2001 to 2012.

In any case, it has become too easy to heap scorn on the gold miners, and the stock prices reflect that pessimism.  But just like silver, the subject of today’s CotD, GDX shows some technical signs for potential optimism.  

Like silver, it made a new low, but has since bounced on the day to recover, and it showing the same positive divergence on its RSI:


[caption id="attachment_26080" align="alignnone" width="636"]6 month RSI daily chart of GDX, Courtesy of Bloomberg 6 month RSI daily chart of GDX, Courtesy of Bloomberg[/caption]

Also like silver, it still in a downtrend with a declining 50 day ma, but GDX probably has room to the low 30’s after today’s big bounce.  The problem is that consolidation is the most likely scenario, making simple long option strategies (such as buying a call spread) much less attractive to me, even though I have an upward bias.  Aside from just nibbling on some long GDX stock here, there are a couple trades that I looked at today that fit my short vol, long delta bias in the ETF, though I have executed nothing.

1)  Sell the May31st expiry 28/26 put spread at around $0.75, which would give me a break-even around 27.25, and would not need much of a rally to make a max gain by next Friday.  The issue with this trade is that the gain is limited to the $0.75 in premium, a bit underwhelming if we did make an important short-term low today.

2)  Buy the Jul 27.50 / 30 / 32.50 call fly for around $0.50.  That would basically be a range bet that would be profitable if GDX closed between 28 and 32 on July expiry.  It’s a bet on continued rangebound price action over the next couple months as GDX potentially builds a longer-term base.  The main downside here is that I would have to wait at least a month before the trade started to appreciate more quickly.

While GDX and SLV might have made important short-term lows, simply buying the ETFs might be the better course of action for a trade than any options-related trade here.  Regardless, I do feel strongly about my bias to buy delta and sell vol in this sector.