Update – Golddigger (GDX)

by CC September 7, 2016 2:27 pm • Trade Updates

Two weeks ago on August 24th we took a look at GDX, the Vaneck Vectors Gold Miners etf, on one of its worst down days it had seen in months. We laid out a scenario where we could see the GDX re-testing the prior highs in the next few months, and we identified a call calendar for those looking to catch the falling gold miners, but with defined risk. Here was the trade idea and rationale at the time when the etf was 27.80:  

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.

GDX continued lower before bouncing at 25.50. Now with it back higher (28.25) than the original idea entry (27.70) the call calendar is a slight winner, worth about 1.25 vs the 1.00 initially at risk. The September 30 calls are worth about .15 vs the initial .33 sale price. So as far as management goes that .15 won’t help a great deal if GDX were to go lower from here. On the upside, there’s almost 2 dollars in room for the etf to go higher before any roll is necessary. But if those Sept 30 calls continue to decay and get to less than .10 then a few rolls could make sense, including closing the Sept 30 calls and rolling out a month and up $2 to the Oct 32 calls (right now .45). That would leave a fairly cheap Oct/Nov, 2 dollar wide vertical calendar that allows for even more room to the upside into Oct expiration while keeping the bullish view all the way out to November.

Lastly, there was some interesting call activity in the GDX today, two blocks of out of the money calls apparently bought to open. First when the etf was $28 at noon a trader bought to open 8,000 Sept 23rd weekly 30 calls for 34 cents.  These calls break-even at $30.34, up 8.3% on Sept 23rd weekly close, which also happens to be the week of the Federal Reserve’s next meeting.  The prior high of the GDX came last month just below $32.

Also, a bit later when the etf was $28.09, a trader bought to open 10,000 Oct 32,5 calls for 36 cents. These calls break-even at $32.86, up 17% from the trading at what would be a new 52 week and 3 year highs.

For the time being the stock seems range bound between $25 on the downside and $30, the recent breakdown level, and the uptrend:

GDX 1yr chart from Bloomberg
GDX 1yr chart from Bloomberg