Amid Bitcoin Brouhaha, Traders Pay Up for GDX Crash Protection

Out-of-the-money put option prices have skyrocketed on this commodity play

Editor-in-Chief
Dec 19, 2017 at 9:45 AM
facebook X logo linkedin


Unless you've been hiding under a rock, you've likely been bombarded by bitcoin-related headlines over the past couple of weeks. Not only are various talking heads already suggesting a "bitcoin bubble" in the wake of last week's highly anticipated bitcoin futures launch, but several media outlets have attributed the recently dulled appetite for gold and other commodities to the soaring popularity of the volatile cryptocurrency.

The December 2017 cover of Modern Trader magazine, for instance, asks, "Will Bitcoin Eclipse Gold?" Likewise, from the front page of the Dec. 14 issue of The Wall Street Journal: "Bitcoin Fever Spreads to Commodity Traders," with the corresponding article noting that the number of commodity-based hedge fund closures surpassed launches for the first time ever this year, looking at data since 2000. At the same time, more than 120 cryptocurrency funds were launched in 2017, compared to fewer than 25 in 2016, per Autonomous Next data.

I found it also fascinating that a senior exchange-traded fund (ETF) analyst at Bloomberg predicted that, "If a bitcoin ETF came out today, it would break a record," raking in $1 billion in no time. Coincidentally, the current recordholder for "First ETF to Bring in $1B in 3 Days" is a gold ETF: the SPDR Gold Trust ETF (GLD), per ETF.com.

But whether bitcoin is solely to blame for gold's recent drop -- and one could argue that the stronger dollar and tax reform optimism have also played a part -- is neither here nor there. What fascinates me is the recent spike in the cost of "crash protection" on the VanEck Vectors Gold Miners ETF (GDX), which invests in the shares of gold miners.

Specifically, the 10-day moving average of GDX's put/call skew on 5% out-of-the-money (OOTM) options – which compares implied volatility (IV) readings for OOTM puts against OOTM calls -- has skyrocketed by more than 20% over the past 20 sessions, and stands at its highest point since December 2014. This indicates traders are bidding up the odds of an extended decline in GDX shares, which fell more than 8% from their Nov. 28 intraday high of $23.17 to their Dec. 12 intraday low of $21.27 – marking territory not charted since July for the fund.

Since 2006, there have been just eight surges of that magnitude in this barometer, including the one that flashed just last week. Three of the signals sounded before the March 2009 bottom, and the other four prior to last week's occurred between September 2013 and November 2014. While I'd like to offer actionable insight into how GDX might perform after this most recent surge in OOTM put demand, the historical price action after such signals is mixed, not to mention very heavily skewed by the November 2008 signal, after which GDX skyrocketed more than 79% in six months, as the throes of the financial crisis sparked a run on "safe haven," tangible assets like gold.

Perhaps the most "concrete" conclusion to be drawn from the data: GDX tends to be more volatile than usual in the intermediate term, following quick-and-dirty spikes in its OOTM put/call skew, as measured by a bigger-than-usual standard deviation of returns following these signals.

So, while the sample size is small, if recent history repeats, GDX could see some volatility over the next six months -- and possibly break out of its 2017 confinement, with the $21-$22 area emerging as support this year, and advances stopping short in the $24-$26 range. In the even shorter term, though, it's worth noting that January and February tend to be the best months of the year for the ETF, which has averaged monthly returns of 2.7% and 5.3%, respectively, since inception. With that in mind, here are some levels on our near-term radar:

  • $20.92 = YTD breakeven
  • $22.02 = a 50% Fib retracement of GDX's rally from 2016 lows to 2016 highs
  • $24.22 = a 38.2% Fib retracement of the aforementioned 2016 rally
  • $24.94 = double the 2016 closing low
  • $25.05 = 0.8x the 2016 closing high
  • $25.10 = 20% YTD gain
  • $26.00 = where GDX closed prior to the October 2016 bear gap

 

GDX chart with Fib levels



Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, December 17.
 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI