Bargain-Hunting GDX Options Traders Strike as Gold Prices Pop

Options traders have been buying to open puts on GDX ahead of next week's Fed meeting

by Karee Venema

Published on Jul 18, 2017 at 12:17 PM
Updated on Jun 24, 2020 at 10:16 AM

Gold futures are trading higher today, with the August-dated contract up 0.6% at $1,240.40 an ounce, following Senate Republicans' failed Obamacare replacement effort. As such, the VanEck Vectors Gold Miners ETF (GDX) has swung 1.1% higher to trade at $22.23. Nevertheless, put volume is running at an accelerated clip, with 47,032 contracts traded so far -- double what's typically seen at this point in the day.

Most active are the weekly 8/25 20.50- and 21-strike puts, where 28,000 contracts have collectively traded. It looks like the bulk of the activity is of the buy-to-open kind, meaning options traders are bracing for a quick retreat for the exchange-traded fund (ETF) over the next five weeks -- a time frame that includes a Fed meeting and jobs report.

This bearish positioning isn't new. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), GDX's 10-day put/call volume ratio of 0.92 ranks in the 77th percentile of its annual range. In other words, puts have been bought to open relative to calls at a faster-than-usual clip. Plus, total put open interest of 1.2 million contracts is docked in the 87th annual percentile.

The gold fund's most populated put strikes are LEAPS. However, the July 20 and 22 puts round out GDX's top 20 open interest positions, where nearly 63,200 contracts collectively reside. Data from the major options exchanges confirms notable buy-to-open activity at both strikes, which expire at this Friday's close.

With today's dollar-induced pop, GDX has brought its 2017 lead to 6.2%. The gold fund could see some additional volatility in next week's trading, with the Fed's two-day policy-setting meeting kicking off on Tuesday, July 25. While no rate hike is expected this time around, GDX is one of the best ETFs to own during a Fed week. 

And whichever way GDX options traders choose to go, now's a prime time to buy premium on the fund's short-term contracts. Despite the upcoming Fed meeting and an Aug. 4 jobs report, GDX's Schaeffer's Volatility Index (SVI) of 26% ranks in the 8th annual percentile, meaning low volatility expectations are currently priced into its near-term options.

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