Amid Bitcoin Brouhaha, Traders Pay Up for GDX Crash Protection

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

Dec 19, 2017 at 9:45 AM
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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

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

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