Gold bugs are on the verge of being squashed again.
For the past two months, the gold complex has enjoyed a respectable little rally … but unfortunately, it appears the respite has run its course.
A rising dollar and deteriorating technicals are once again dragging gold stocks into the abyss. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) was down 4% last week and looks to be gapping lower another 2% this morning.
On the technical front, the most significant pattern defining the recent behavior in GDX is the two-month trendline. With the ailing GDX ETF set to gap below this threshold today, it appears lower prices are now in the offing for gold stocks.
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To get a handle of the recent relationship between gold miners and the greenback, consider the following chart displaying the GDX (candlestick) with an overlay of the U.S. dollar (green line).
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The correlation between the two has been deep into negative territory for the past few months, confirming that dollar strength has — surprise, surprise — been a significant headwind for gold mining stocks. The sharp rebound in the buck has no doubt been a significant contributor to the ongoing swoon in GDX.
Options on the GDX ETF are being offered on the cheap these days. The implied volatility for GDX options has been on the decline throughout the entirety of 2015. Since coming into the year at a lofty 50%, implied volatility has descended to 29%. With an IV rank at a lowly 7%, profit margins for option sellers have all but dried up.
On the positive side, option buyers are now able to grab calls and puts on the cheap.
Buy GDX Puts
In light of the bearish price action and depressed option premiums, long GDX puts make sense here.
Buy the July $19 puts for around 40 cents. The risk is limited to the initial debit and will be forfeited if GDX sits above $19 at July expiration. The potential reward is unlimited, allowing us to really rack up the profits should the downturn in gold mining stocks turn nasty.
As of this writing, Tyler Craig owned neutral option positions on GLD.
