MorningWord 11/19/14: Someone Digs $GDX

by Dan November 19, 2014 9:34 am • Commentary

GDX (the Gold Miner etf) has rallied 23% since November 5th in what has felt like a straight line.  Juxtaposed against the 5% rally in the GLD (the etf on the underlying commodity), the move in the miners seems quite extraordinary.  There was a large options trade in the GDX yesterday that caught my eye.  I discussed it last night on CNBC’s Fast Money (watch here), but wanted to break down the trade a bit more today as I found the duration, choice of strikes and structure fairly interesting.

Here was the trade when the etf was $19.70 yesterday:

Bought Jan 2016 20/26 Call Spread for $1.70 or $6,630,000 in premium

BOUGHT to OPEN 39,000 Jan 2016 20 Calls for 3.10 or $12,090,000 in premium

SOLD to OPEN 39,000 Jan 2016 26 Calls for 1.40 or $5,460,000 in premium

AND to help finance the Call Spread

SOLD to OPEN 13,000 Jan 2016 $13 Puts at .65 or $845,000 in premium

SOLD to OPEN 26,000 Jan 2016 $12 Puts at .50 or $1,300,000 in premium

Put Sale Premium Received = $2.145,000

Total premium outlay is about $4.5 million


Here is the break-even on Jan 2016 Expiration:

Negative Outcomes:

Between about $21.25 and $13 lose up to $4.5 million

Worst case scenario, GDX below $13, trader loses all $4.5 million in premium, but put 1,300,000 shares of GDX stock at $13 and losses below $13 on a 1 to 1 basis.Then below $12, trader is put an additional 2,600,000 shares of GDX stock at $12 with losses below that.

Positive Outcomes: 

Between about $21.25 and $26 make up to $4.75 or about $19 million, max gain of about $19 million above $26

As far as duration, I am surprised that the trader chose such a long dated expiration, especially given how quickly the etf can move.  One possible reason is that the trader wanted to sell downside puts much lower than GDX’s current level, but the 12 or 13 put strike premium was only significant enough if the trader went out to Jan16 expiration.

Let’s look at some charts and get a sense for the choice of strikes.  The one year chart below shows what looked to be a selling crescendo from its breakdown at $20, down to almost $16 in late October to the low on November 5th. (which was on the largest trading volume in years):

GDX ytd from Bloomberg
GDX ytd from Bloomberg

On a longer term basis, the 7 year weekly chart below shows that the recent low just above $16 got within 5% of the GDX low in 2008 of $15.83:

GDX 7yr chart from Bloomberg
GDX 7yr chart from Bloomberg

The $15-$16 area is critical support going forward.  Perhaps the put strikes were chosen with that area in mind, plus some margin for error in case GDX gets especially oversold.  The $26 level on the upside appears to be healthy technical resistance for much of 2014, as it was a level around which the etf consolidated in the spring prior to breaking down, and then again for most of the summer.

I would just add that while $20 seems like a logical long strike, $26 on the upside, the point in which gains would be capped, seems a bit tight as $30 seems like a reasonable target on the upside if GDX gains traction over the next year.  The $30 level was an important break-down spot from 2013:

GDX 3yr chart from Bloomberg
GDX 3yr chart from Bloomberg

Oh and all those strikes.  Why so much premium selling?  Well, the 1 year chart of 30 day at-the-money implied vol shows the massive ramp in options prices in the last few months.  While long dated vols were impacted less than short dated the intention of the structure was to take advantage of what would be a vol compression if and when the etf were to rise and exit the danger zone.

GDX 1yr chart of 30 day at the money implied vol from Bloomberg
GDX 1yr chart of 30 day at the money implied vol from Bloomberg

GDX has underperformed GLD and SLV since the precious metals topped in mid-2011.  A big bullish bet in the options market combined with large volume buying in the past 3 weeks could be an indication that investors finally view the precious metals miners as sufficiently undervalued relative to the commodities themselves.  In that case, perhaps gold and silver simply need to stop declining for GDX to catch a bid in 2015.