Volatility Trader Strangles Gold Miner ETF

Today's trader is expecting another breakout, but appears unsure on the ETF's next direction

Managing Editor
Aug 29, 2019 at 3:29 PM
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Shares of VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) are sinking this afternoon, down 2.7% at $29.57. However, today it looks like one trader is betting on a massive move for GDX over the next few months. Below, we'll take a closer look at the outcomes for this ambitious options trade, as well as how the gold ETF has been performing from a long-term perspective.

Today's pullback aside, the gold ETF has been on a steady climb. The 30-day moving average has captured three brief pullbacks since July, guiding the shares 40% higher year-to-date. In fact, just yesterday, GDX touched a three-year peak of $30.81. 

Daily GDX with 30MA

In the options pits, the VanEck Vectors Gold Miners ETF's call volume today is pacing in the 90th annual percentile, with over 128,000 calls exchanged so far. Also seeing heavy volume are puts, with 1.7 times the expected intraday amount having changed hands already (66,713 contracts versus about 40,000 expected).

Among the most active GDX option strikes are the January 2020 25-strike put and January 2020 33-strike call, which look to have been involved in a bullish volatility transaction called a long strangle. Diving in, it looks like a trader bought to open 2,000 of the January 33 calls for $1.50 each, and simultaneously bought to open 2,000 of the January 25 puts for $0.56 each.

This results in a total net debit of $2.06 per pair of options, or $412,000 total (number of strangles x 100 shares per contract x net debit) -- which represents the maximum possible loss on the trade. The strategy will begin to profit if GDX moves below $22.94 (put strike minus net debit), or if GDX breaks above $35.06 (call strike plus net debit), prior to January options expiration.

Had the trader simply bought the 25-strike puts, they would only benefit if the stock fell below the less aggressive downside breakeven point of $24.44 (put strike minus put premium paid) when the options expired in January. On the flip side, if the trader had only purchased the 33-strike calls, they would begin seeing profits on a more modest upside move by GDX above $34.50 by January expiration (call strike plus call premium paid). 

In simpler terms, today's trade offered an opportunity for the trader to profit from either bullish or bearish price action -- but at an increased cost, relative to a traditional single call or put play.

Based on the total net debit, today's GDX strangle speculator needs the ETF to either rally more than 18.6% or fall more than 22.4% over the next five months until expiration. As a point of reference, GDX's current 120-day historical volatility stands at 28.1%, in the 87th percentile of its annual range.


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