Messin’ With a Gold Digger – (GDX)

by riskreversal December 19, 2016 2:10 pm • Trade Ideas

Gold and Gold mining stocks have been left out of the rally in just about every other risk asset on the planet since early November. While materials and mining stocks (measured by the XLB, the S&P Materials etf) made a new 52 week high, rallying 10% from its Nov 8th lows, it has sold off nearly 3% over the last week, failing below its all time highs made in early 2015:

XLB 5 year chart from Bloomberg

To be fair metals and mining stocks make up a small percentage of the weight of the XLB, but its worth noting that stocks like Freeport McMoran (FCX), the copper miner, an XLB component is up 100% ytd while the GDX (the Gold Mining etf) is only up 40% on the year, but maybe more importantly down 40% from its 52 week highs made in August, and just last week breaking below key technical support at $20:

GDX 1yr chart from Bloomberg

The GDX caught my eye as there was just a decent size call buyer looking out a month, apparently playing for a rebound back above former support, now resistance. When the etf was trading $19.20 a trader bought to open 25,000 Jan 27th weekly expiration 20.50 calls for 63 cents.  These calls break-even at $21.13, up about 10% in about 5 weeks.

Short dated options prices are at the mid point of their 52 week range, with 3o day at the money implied volatility in the GDX at 45%, which may seem high with a VIX sub 12%. But a look at the one year chart of IV (blue below) vs 30 day realized volatility (white below, how much the etf is actually moving), above 50%, may highlight the relative cheapness of options prices for those looking to make defined risk directional bets:

[caption id="attachment_69057" align="aligncenter" width="600"] GDX 1yr chart of implied vol vs realized vol from Bloomberg[/caption]

Putting this year’s rally off of the lows, and the subsequent declines from the recent highs in some context, it is worth looking at the long term technical set up. First things first, the 80% peak to trough decline from the all time highs in 2011 to its January 2016 lows was nothing short of epic, kind of Nasdaq 2000-esque.  Which is why the break above the long term downtrend in February had some legs. A this point it seems destined to overshoot on the downside, back towards its 2008 low near $15, which served as technical resintance for the end of 2015/early 2016:

[caption id="attachment_69060" align="aligncenter" width="600"] GDX 10yr chart from Bloomberg[/caption]

Ill offer are usual disclaimer when it comes to parsing unusual options flow, with out intimate knowledge of the trade or the traders intent it is nearly impossible to glean anything useful from the trade on its appearance. For instance, while this call purchase might infact be a defined risk bullish bet, it could also be a short term hedge for a trader who is short a boat load of GDX, or maybe even GLD? You get the point, highlighting the activity merely gets us looking at the story, considering other inputs, like fundamentals, technicals and options pricing which might help inform our own thesis, if one exists.