As regular readers know, I am not schooled in the intricacies of why investors buy gold or gold related stocks. I get the quasi “doom and gloom” science behind it, but its just not my cup of tea for trading it for fundamental reasons, cause I just cant think of any, ever.
The GLD and the GDX have set up as nifty trading vehicles for those who can conceive of other inputs to arrive at a directional thesis. On Friday there was some unusual options activity in GDX that caught my eye where an investor paid .75 for 20,000 of the Dec 30/35 call spread when the etf was $26.90, the trade breaks even on Dec expiration at $30.75, up about 14% from Friday’s close, with the max gain of 4.25 if GDX is $35 or higher, up about 20%. That enthusiasm was met with today’s sharp reversal that could make a near-term double top near $28 (matching the high from March).
The two year chart of the GDX below shows the etf’s fairly dramatic declines of about 50% from the Sept 2012 highs, and since breaking below $30 in April of last year the etf remaining range-bound between $30 and $20:
With today’s 3% declines, GDX is now once again approaching the mid point of the 16 month range, and implied vol has recently picked up from the 52 week lows:
Additionally, GLD has been in an interesting range since the start of April, and for the better part of the last year trading between $120 and $130. Today’s decline saw the etf bounce from nearly the mid point of the range, just above the 50 day (purple) and 200 day (yellow) moving averages just below $125:
In the case of GLD, it has seen IV pick up much less than the GDX that tracks a group of stocks that tends to move far greater than the moves in the underlying commodity:
Barring some unforeseen break higher or lower in the commodity it makes sense to take advantage of this range until proven wrong. One way to do that is through the purchase of an in the money butterfly centered at the midpoint of the range. We like the Aug or Sept 130/125/120 flies and may enter into one of those positions soon.