Market Vectors Gold Miners ETF (GDX) Spread Strategist Bets On Big Bounce

The Market Vectors Gold Miners ETF (GDX) found a foothold atop its 320-day moving average earlier, even as gold futures retreat

Dec 5, 2016 at 1:57 PM
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Coming off a fourth straight weekly loss, gold futures are trading lower once again -- with the most active, February-dated contract slightly off at $1,177.80 an ounce -- as hawkish words from New York Fed President William Dudley echo the near-unanimous expectation of a December rate hike. This negative price action was seen earlier in the Market Vectors Gold Miners ETF (GDX), which was down as much as 3.5% at one point. Nevertheless, the exchange-traded fund (ETF) found a foothold atop its 320-day moving average to trim its loss to 0.2% at $21.33. And with another layer of support located just underneath at $20.58 -- home to GDX's 50% year-to-date return -- one cautiously optimistic option trader is eyeing a big bounce over the next several months for shares of the gold ETF.

gdx daily _ dec 5

Drilling down on today's option activity, roughly 119,000 GDX calls have traded so far -- nearly two times the average intraday pace -- compared to 32,700 puts. Receiving notable attention is the stock's March 27 and 33.50 calls, where Trade-Alert suggests one speculator initiated a long call spread for an initial cash outlay of $330,000 [($0.40 premium paid for long 27 call - $0.07 premium collected for short 33.50 call) * 10,000-contract spread * 100 shares per contract].

The trader will begin to accrue a profit once GDX moves past breakeven at $27.33 (bought strike plus the net debit) -- territory not charted since late September. However, by implementing the long call spread, she was willing to sacrifice the unlimited profit potential of a straight call purchase in order to trim her maximum cost of entry with the sold call. In other words, the most this trader stands to gain is $6.17 million [(difference between the two strikes, less the net debit) * 10,000-contract spread * 100 shares per contract], should GDX settle at or above $33.50 at expiration. Risk, meanwhile, is limited to the net debit paid.

More broadly speaking, speculative players have been buying to open calls relative to puts at a faster-than-usual clip on the Market Vectors Gold Miners ETF (GDX) of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF's 10-day call/put volume ratio of 1.98 ranks in the 76th annual percentile. In fact, today's single-session put/call volume ratio of 0.33 is set to settle below 97% of all comparable readings taken in the past year.

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