Gold miners, measured by the GDX have been one of the best performing risk assets in the world in 2016. The GDX is up 66% in 2016, but up a 86% from its 2016 low made in January. It’s truly amazing to see that sort of price action in an etf made up of a group of stocks that could have been so mis-priced just three months ago. Taking a quick look at the one year chart below, the recent breakout of the consolidation at the prior 52 week high is fairly impressive, and we have seen continued bullish rolls in the options market where traders have rolled up and out their bullish views.
The largest trade in the options market so far today was an apparent new bearish or defensive trade when the GDX was trading $23.30, a trader bought to open 100,000 of the June 18 / 14 put spreads to open, paying 24 cents for the June 18 puts and selling the June 14 puts at 1 cent (that’s $2.3 million in premium). This trade break-seven on the downside at $17.77, or down about 24% in less than two months. The trade offers potential gains of up to $3.77, or $37.7 million between $17.77 and $14, with max gain at $14. The options market though is suggesting less than a 10% probability that the June 18 puts will be in the money on June expiration, which leads me to believe that this trade is either leveraging a short position, a disaster hedge against a long position, or merely a macro player looking for the assets with potential for dramatic movement with dollar cheap options.
Lastly, a quick look at the 8 year chart shows the persistent downtrend that had been in place since its 2011 highs, that ultimately bottomed out in January after an 82% peak to trough decline. Nearly 100% gains in such a short period of time, after such a long persistent bear market could have legs to the high $20s, but I’d be shocked if it got through $30 anytime soon.
Enough with the technical mumbo jumbo, if you were looking to make a near term bearish bet on the GDX, with defined risk with options, I am not sure a trade like this is the way to do it on an outright basis. Basically risking 1% of the etf price that it will be down 24% in two months, there are better bets on the board. Just saying.