Today we got less than expected easing from the ECB that triggered a massive risk off sell off in Europe, while on this side of the Atlantic the Fed Chair continues to make the case for gradual rates increases, despite getting weak November manufacturing and services data over the last two days. Immediately following this morning’s interest rate and QE guidance from the ECB, the Euro rallied massively vs the US Dollar (now up 3% on the day), U.S. Treasury yields spiked with the yield on the 10 year treasury back above 2.3% (bonds smacked obviously, the TLT is down 2.8%), crude oil is ripping up 3.5%, global equities are getting smoked (except Brazil thanks to oil) and gold caught a slight bid after making new 52 week and five year lows this morning.
Tomorrow morning we will get the November non-farm payrolls / unemployment number. Weaker than expected data could cause a sharp reversal in US Treasuries, while reinforcing the weakness in the U.S. dollar. Basically, if there is weak Nov jobs data, then it lessens the probability of a December liftoff (currently around 74%) and/or increases the likelihood of 1 and done. If that’s the case we would see treasuries bought, and the dollar sold.
Earlier today in the MorningWord (here) I offered some thoughts on our current positioning in long dollar calls via the UUP. If Nov data is in line, then the Fed raises and today’s dollar weakness could be a good buying opportunity. As I said in a post yesterday quoting The Dude “This is a very complicated case….You know, a lotta ins, a lotta outs, a lotta what-have-yous”. I suspect I will be using it more frequently. The ECB lack of commitment to rate cuts and QE certainly was not a consensus view and unsettled a few consensus trades today.
But it has also sparked a bit of a contrarian trade today, with some speculating that dollar weakness continues, causing gold and gold miners to rally off of multi-year lows. In the GLD, the etf that tracks the commodity, call volume is 2.5x of average daily volume with what looks like opening Jan16 108 and 115 calls when the etf was $101. This action was not particularly interesting to me given the low delta of the options. It has a low probability of success and minimal capital commitment, basically a lotto ticket.
But there was an interesting bullish trade in the GDX, the etf that tracks the Gold Miners that caught my eye.
When the etf was $13.90 there was an opening buyer of 20,000 of the June 15/20 call spreads for 1.04 (buying 20,000 of the June 15 calls for 1.38, and selling 20,000 June 20 calls at .34). The premium outlay is about $2.08 million. The break-even on the upside is $16.04, about about 15%. The trader can make up to $7.92 million between $16.04 and $20, with a max gain of $7.92 million if the etf is above $20, or 42% higher on June expiration.
Targeting a 40% rally in six months sounds nuts right? But if you look at the counter trend rallies in gold and the miners since its highs in 2011, there have been massive opportunities to make money on the long side, despite the commodities crash. Larry McDonald, the Head of U.S. Strategy at Societe Generale pointed this out to clients in a note back in July, and since getting another one of these Bear Market Rallies, it makes sense to highlight this options trade given recent events:
May – September 2012: 35%
June – September 2013: 39%
December – March 2014: 41%
November – March 2015: 36%
July – October 2015: 35%
The trade detailed above is seemingly playing for the sort of counter-trend rally that has come in the GDX in each year since the highs in 2011, sometimes its happened more than once. But I want to emphasize that these are counter-trend rallies. Despite them, the GDX is down about 80% from its all time highs, and timing and risk management are imperative if attempting such a trade.
The risk reward seems OK, we might consider a similar trade with slightly tighter strikes, but likely from a slightly worse state of sentiment towards the shiny metal and those who yank it out of the ground.