After being left for dead, gold mining stocks are finally clawing their way out of the grave. Aided by a respectable rebound in gold prices, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) scored a 22% gain in the first three weeks of 2015 alone.
Not bad for a beaten-down, unloved space like gold miners.
The recent bottoming action in GDX allowed us to turn gold into cash, and I think the current pullback offers another such opportunity.
Since gold and gold mining stocks are birds of a like feather, let’s analyze the charts of both to see what the future holds. We’ll use the SPDR Gold Trust (ETF) (NYSEARCA:GLD) — the indisputable king of gold ETFs — to represent the yellow metal.
The new year kicked off with a mad dash, not for cash, but for gold. The sudden infatuation with gold recently drove trading volume for GLD through the roof. In fact, the trading volume in GLD for the week of Jan 12 to Jan 16 was higher than any week last year.
The high-volume surge completed a bottoming pattern in GLD by busting through a couple of key resistance levels. With the 20- and 50-day moving averages now rising, bulls have definitely secured a foothold.
The action in the GDX ETF is similar to that of gold. Its recent breakout successfully turned the short-term trend higher with a rising 50-day moving average to boot. What really piqued my interest over the weekend was the current multi-day pullback. Mild dips like the one in GDX provide low-risk opportunities for sidelined bulls looking to get in on the action.
Option Plays for GDX
Aggressive traders could buy the March 21 call for $2.05 or better. The risk is limited to the initial $205 paid per contract and will be lost if GDX sits below $21 at expiration. The potential reward is unlimited, so if GDX really rips this play will deliver a high-percentage return.
Traders looking for a higher probability play could sell the Feb 27 $20.50 put for 55 cents or better. The reward is limited to the initial 55 cents received and will be captured if GDX remains above $20.50 by expiration.
By shorting a put you obligate yourself to buy 100 shares of GDX at a cost basis of $19.55 if you end up being assigned. This will occur at expiration if GDX sits below $20.50.
At the time of this writing Tyler Craig owned bullish option positions on GDX.
