GDX Options Traders Scoop Up Pre-Fed Calls

The latest CoT data showed a ninth straight rise in additions to the gold contract

Sep 18, 2017 at 3:05 PM
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Gold prices will be in focus this week, with the Federal Open Market Committee's (FOMC) latest policy decision due on Wednesday afternoon and a press conference from Fed Chair Janet Yellen to follow. Though no rate hike is expected this time around, the VanEck Vectors Gold Miners ETF (GDX) is trading down 1.6% at $23.74 -- paring its year-to-date lead to 13.5% -- as U.S. stocks climb to new record highs. Nevertheless, GDX options traders are trading calls at an accelerated clip, and appear to be targeting a quick bounce over the next few weeks. 

At last check, 62,580 calls have changed hands -- 1.1 times what's typically seen at this point in the day -- compared to 28,257 puts. Most active is the October 26 call, with the weekly 9/22 and 9/29 24-strike calls also in high demand. It seems likely new positions are being purchased across the board, and if this is the case, the goal is for GDX to surge north of the strikes by the respective expiration dates.

This appetite for bullish bets is nothing new in GDX's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 107,625 calls have been bought to open in the past 10 days, compared to 53,765 puts. The resultant call/put volume ratio of 2.00 ranks in the 76th annual percentile, meaning this rate of call buying relative to put buying has been faster than usual.

Similar to today's action, the October 26 call saw the biggest rise in open interest over this time frame, with nearly 63,300 contracts added. The bulk of this activity occurred last Friday, when several large blocks were bought to open -- the biggest of which was a 19,105-contract lot that crossed for $0.22 apiece.

It's likely that some of this activity is a result of options traders betting on higher gold prices in the near term, a bullish positioning echoed in the latest Commitments of Traders (CoT) report. Specifically, data showed a ninth straight week of additions on the gold contract -- the longest accumulation by large speculators since Sept. 27.

However, it's also possible that some of the out-of-the-money call buying is indicative of GDX shorts hedging their bearish bets against any upside risk. Short interest on the exchange-traded fund (ETF) topped out at a record 70.49 million shares in the Aug. 15 reporting period, and fell just 2.1% in the most recent reporting period to 69 million shares sold short.

Regardless of the reason, it's a prime time to bet on GDX's near-term trajectory with options. The fund's 30-day at-the-money implied volatility of 25.3% ranks in the 11th annual percentile, meaning short-term options premiums are pricing in relatively low volatility expectations at the moment.


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