GDX Options Volume Could Sound Alarm Bells

The VanEck Vectors Gold Miners ETF (GDX) just sent up a relatively rare bearish signal, if recent past is prologue. According to Schaeffer's Quantitative Analyst Chris Prybal, 50-day cumulative buy-to-open (BTO) options volume hit 1 million contracts on the exchange-traded fund (ETF) last week -- something that's happened only one other time on record.

Specifically, GDX's 50-day cumulative BTO options volume hit seven figures for four straight days: Feb. 23-28. Prior to that, you'd have to go back to July 11, 2016, to see volume of that magnitude. And after that signal, it was downhill for GDX. The ETF went on to log a two-week drop of 3.1%, and was down anywhere from 10.2% to 23.1% from two months to six months out.

While this is a very small sample size, and one has to take into account the macro climate -- the signal happened just after the Brexit shocker, and just a few months before the start of the "Trump rally" -- there's another similarity to July 2016: the implied volatility (IV) skew on the SPDR Gold Trust (GLD) was very low, as it is now. Low IV skews indicate calls are in greater demand than puts, and have preceded weak GLD price action of late. Not to mention March is historically a bad month to own both GDX and GLD.

However, as Schaeffer's Senior V.P. of Research Todd Salamone wrote in today's Monday Morning Outlook, "There is seasonal risk, but gold has performed well after large speculators bailed ahead of this year's advance (per Commitments of Traders data). This group has tiptoed back into the yellow metal in recent weeks, but there is plenty of room for further capitulation to the bull camp."

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