The Gold Miners’ etf, the GDX is having one of its worst days in months, down 4.5% as I write, with the etf trading below the uptrend that has been in place since mid January. The rally from the 10 year lows made in January to its recent 52 week and 3 year highs yielded a 150% gain (now merely 124%):
The options market for the most part has been fairly complacent about the etf’s gains, as 30 day at the money implied volatility (the price of options – blue line below) tracked the lack of overall two way movement in the etf, as realized volatility (the movement of the underlying – white line below) as both recently made 52 week lows, as the etf was just at 52 week highs:
So What’s the Trade?
U.S. stocks march to all time highs and recent consolidation has yielding one of the lowest levels of volatility in decades. Yet risk assets like gold & Treasury bonds have remained bid, normally a sign of risk off. That means if stocks were to decline GDX might find itself right back at the recent highs near $32. But the pullback in GDX over the past few weeks has been swift. So it’s hard to tell where the perfect entry for a run back to the highs is. Therefore defining risk while taking advantage of the last few weeks of Summer makes sense as implied volatility should stay low through Labor Day weekend.
We lack conviction on a long entry at nearly the mid point of the $25 to $30 range, but if we were inclined to play leaning long, financing out of the money calls in November, which will catch 2 fed meetings and the presidential election make sense as a catalyst. So the idea would be to sell Sept calls to own Nov. Here is one way to do this:
GDX ($27.80) Buy the Sept/Nov 30 call calendar for 1.00
- Sell 1 Sept 30 call at .33
- Buy 1 November 30 call for 1.33
Rationale – This defines risk to just $1 and yet has unlimited upside after Sept expiration. Ideally the Sept calls expire worthless and the Nov calls can then be spread. If GDX doesn’t hold here and goes lower a 50% premium stop is the way to go, that keeps risk reward highly favorable as much more than that can be made if the stock goes higher towards 30 into Sept expiration. This trade fades late Summer volatility in order to own what is more likely a volatile period for risk assets into the Sept Fed meeting and November’s election.