Thursday’s jump in gold prices was accompanied by a lively rally by gold mining stocks across the board. The Market Vectors Gold Miners ETF (GDX) surged 7.7%, improving its technical posture notably in the process.
Top holdings Goldcorp (GG), Newmont Mining Corp (NEM) and Barrick Gold Corp (ABX) enjoyed the bullish stampeded, soaring 7.5%, 8%, and 10.6%, respectively.
While this may be another in a long line of failed recovery attempts in beaten-down gold stocks, a few promising developments suggest the downturn in GDX could be halted for a spell.
And therein lies opportunity: There are a number of ways to profit should gold mining stocks transition into a trading range.
The first bullish victory worth mention is buyers’ staunch defense of the $13 price zone. Major support has developed, halting no less than five breakdown attempts. Provided GDX prices remain north of $13, the bullish case is intact.
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A second improvement is the increasing number of high-volume up days (i.e., accumulation days) that have cropped up over the past few months. With buying interest on the rise, selloffs in GDX may not be as deep and prolonged as they once were.
The final sign to watch out for is a breakout over near-term resistance. Such a move would validate the recent bottoming attempts and kick off a more sustainable rally. Watch for a breach of $14.70 in the coming weeks.
A Golden Short Put Play on GDX
Given the number of false starts GDX has suffered over the months, betting on a massive rebound isn’t the way to go. Instead, use the recent signs of stability as an excuse to look for short put plays. That way you get paid even if gold mining stocks fiddle around at current prices.
The low price tag of the GDX ETF is keeping the margin requirement for short puts extremely depressed, which is generating a very attractive return on investment.
Sell the Nov $12.50 put for 50 cents. The max reward is limited to the initial 50 cents and will be pocketed if GDX can remain above $12.50 by November expiration.
By selling the put, you obligate yourself to buy 100 shares of GDX should it sit below $12.50 at expiration. If you’re not a fan of accumulating shares of GDX at these levels, simply buy back the put to close the position if it descends below $12.50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
