Breaking Down a Big Bullish Options Bet on Gold

One options trader is targeting a major rally for GDX by March

by Patrick Martin

Published on Dec 12, 2019 at 2:12 PM

Gold prices have gained ground in the second half of 2019, as U.S.-China trade anxiety sparked an appetite for the safe-haven asset. This positive price action has been seen in the VanEck Vectors Gold Miners ETF (GDX), which is up 19% in the past six months. More recently, the exchange-traded fund (ETF) has consolidated below $28 since late September, but one options trader is targeting big gains for the shares in 2020. 

Yesterday, it appears a trader bought 42,000 March 30 calls for $0.83 apiece, while simultaneously selling to open an equal amount of March 33 calls for $0.30 each. This bull call spread was established for a net debit of $0.53 per pair of options, or $2.2 million total (net debit x 100 shares per contract x 42,000 spreads).

The trader will begin to profit if GDX is trading above breakeven at $30.53 (bought strike plus net debit) before the options expire on Friday, March. 20. However, the speculator's reward is capped at $2.47 per spread (difference between the two strikes less the net debit) no matter how far above $33 the ETF might climb. Losses, meanwhile, are limited to the initial net debit, should GDX stay below $30 through expiration.

Before this week, GDX options traders had preferred call buying, based on its 10-day call/put volume ratio of 5.07 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, this ratio ranks in the 95th percentile of its annual range, indicating this rate of call buying relative to put buying is rare.

Looking at the charts, the $33 level represents an almost 19% premium to GDX's close last night at $27.71. To hit that mark, the gold ETF -- last seen trading at $27.60 -- will have to take out that key $28 level. This area is also home to its 80-day moving average, a trendline that emerged as a stiff ceiling during its recent consolidation. 

Daily ETF Chart GDX

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