Stock Market Sell-Off Sparks Rush to Gold Options

GDX and ABX call options are flying off the shelves today, as gold rallies amid Trump woes

May 17, 2017 at 1:29 PM
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Gold futures are on pace for a sixth straight day of gains, with the June contract last seen 1.7% higher at $1,257 an ounce. Stock traders are rushing to the perceived safety of tangible assets like gold, as concerns grow about President Donald Trump's ability to push through his political agenda amid a spate of negative headlines. Further, the turmoil in D.C. has pressured the U.S. dollar into the red, making dollar-denominated commodities like gold even more attractive. Against this backdrop, options traders are circling several gold-related stocks and exchange-traded funds (ETFs), including the VanEck Vectors Gold Miners ETF (GDX) and Barrick Gold Corp (USA) (NYSE:ABX).

GDX ETF Aiming for Sixth Straight Gain

Since its near-term low of $20.89 on May 4, the VanEck Vectors Gold Miners ETF has surged 12.3% to sit at $23.46. Further, the gold ETF -- like the aforementioned gold futures contract -- is on pace for a sixth straight daily win, and could end atop its 80-day moving average for the first time since April 21, just before the French election relief rally dimmed the collective appetite for safe havens. GDX is now bumping up against the $23.50 area, which represents a 38.2% Fibonacci retracement of its decline in the second half of 2016, and has acted as a short-term speed bump on a couple occasions in 2017.

gold miners etf gdx chart

Options Traders Take a Shine to Gold ETF

Against this backdrop, GDX calls are flying off the shelves at nearly twice the average intraday clip, with 70,000 across the tape. That's nearly double the number of GDX puts traded so far. Data from the International Securities Exchange (ISE) indicates that one trader likely rolled her position up a strike, selling to close nearly 4,000 now in-the-money June 24 calls, and buying to open nearly 4,000 June 25 calls. The $25 level represents a 50% Fibonacci retracement of the aforementioned GDX decline, and has served as a roadblock for the ETF since the fourth quarter.

Now is a great time to be a short-term GDX options buyer, though. The fund's Schaeffer's Volatility Index (SVI) of 30% is lower than 87% of all other readings from the past year, suggesting near-term options are attractively priced, from a historical volatility standpoint. Plus, GDX sports a Schaeffer's Volatility Scorecard (SVS) of 86, indicating the shares have exceeded options traders' volatility expectations in the past year.

ABX Stock Set for Nine-Day Winning Streak

Barrick Gold stock is on pace for its ninth straight gain, and has rallied 8.3% since putting in a near-term bottom of $15.86 on May 4. ABX stock is now set to retake its 20-day moving average for the first time since the late-April bear gap, but as with GDX, the shares are staring up at a notable level. Specifically, the $17.50 area is a 38.2% Fibonacci retracement of ABX's late-2016 drop, and contained the gold stock's pullback in early March.

barrick gold stock abx chart

ABX Options Traders Place 7-Figure Bets

Barrick Gold Corporation options traders are either betting on or hedging against a major stock rally over the next couple of years. ABX calls are crossing at four times the average intraday pace, with 53,000 contracts traded, compared to roughly 22,000 puts. Data from Trade-Alert points to a couple seven-figure bets on ABX, with one speculator buying to open a block of nearly 16,000 January 2019 30-strike calls for $1.33 million ($0.83 per contract x 100 shares per contract x 15,989 contracts). Barrick shares would need to nearly double by January 2019 for the options to be in the money.

A slightly less aggressive trader bought to open 12,000 January 2019 20-strike calls, per Trade-Alert, for $2.94 million ($2.45 per contract x 100 shares per contract x number of contracts). The round-number $20 level is roughly in the vicinity of a 61.8% Fibonacci retracement of ABX's decline late last year, and is home to the stock's bear gap from August 2016.

As alluded to earlier, the speculators may be hedging against a long-term rally. Short interest on ABX stock surged 31.5% in the two most recent reporting periods, so the out-of-the-money calls may have been bought as insurance. Whatever the motive, today's appetite for Barrick Gold call options is just more of the same. On the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), ABX has racked up a 10-day call/put volume ratio of 4.17 -- in the 94th percentile of its annual range, pointing to a healthier-than-usual appetite for long calls over puts in the past two weeks.

While today's ABX options traders are focusing on longer-term calls, it's the stock's short-term options that are of particular value. Barrick Gold boasts an SVI of 30%, higher than just 5% of all other readings from the past year. Further, the gold stock sports a relatively lofty SVS of 78, suggesting the options market has underpriced ABX's ability to make big moves on the charts during the past 12 months.

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