Gold Rally Drives Red-Hot GDX Options Volume

A VanEck Vectors Gold Miners ETF (GDX) options volume indicator could hit territory not seen since July 2016

Feb 9, 2017 at 4:20 PM
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Gold futures have been flirting with three-month highs, as escalating political uncertainty drives demand for perceived "safe havens." As such, the shares of VanEck Vectors Gold Miners ETF (GDX) have rallied 34% since their mid-December lows to perch at $24.91. Amid this recent rally, GDX options volume has been running hot -- and one signal is about to flash for just the second time ever.

Specifically, GDX's cumulative 50-day buy-to-open option volume is flirting with the 1-million-contract marker -- a level toppled only once, in July 2016, which incorporated the "Brexit" rollercoaster in the stock market, and preceded GDX's three-year peak in August. In the past 10 weeks, 979,290 GDX options have been bought to open, and the rolling number hasn't been below 900,000 since Dec. 27.

GDX 50-day buy-to-open option volume since 2013

GDX chart options volume gold ETF

Drilling down, long puts have emerged as the options of choice in the past two weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.29 GDX puts for every call. This ratio ranks in the 79th percentile of its annual range, indicating a much healthier-than-usual appetite for purchased puts over calls. That's quite the opposite of the SPDR Gold Trust (GLD), which sports a 10-day call/put volume ratio of 2.44 -- in the 76th percentile of its annual range -- as traders scoop up long GLD calls at a rapid-fire rate.

Among options with shelf life, GDX's February 24 put has seen the biggest open interest increase in the past 10 sessions, with nearly 21,500 contracts added -- most of them bought to open. The weekly 2/10 22-, 22.50-, and 23.50-strike puts have also been popular, with approximately 15,000, 18,000, and 20,000 new contracts, respectively. Again, the majority of the puts were purchased to open, and the influx has pushed GDX's Schaeffer's put/call open interest ratio (SOIR) to 1.05 -- higher than two-thirds of the past year's worth of readings, indicating near-term option players are much more put-biased than usual.

It's worth noting that the latest Commitment of Traders (CoT) data indicates that after nine straight weeks of dumping gold, large speculators have accumulated long positions for four consecutive weeks. Considering this, as well as gold's momentum in 2017, much of the recent put buying could be attributable to speculators seeking a hedge.

Whatever the motive, it's an attractive time to purchase short-term options on GDX, considering unusually low volatility expectations are being priced in. The ETF's Schaeffer's Volatility Index (SVI) sits at an annual low of 35%, and GDX sports a Schaeffer's Volatility Scorecard (SVS) of 98, indicating the options market has underpriced GDX's ability to make outsized moves over the last 12 months.

But if recent history is to be believed, those speculators might regret not buying GDX calls. February has been the ETF's strongest month of the year, with the shares averaging a return of 5.3% since GDX's May 2006 inception, according to data from Schaeffer's Quantitative Analyst Chris Prybal. So far this month, the shares of VanEck Vectors Gold Miners ETF (GDX) have added 4.1%.

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