Looking for a Diamond in the Rough? Take a Gander at GDX

Advertisement

While energy-related commodities have failed to capitalize on the U.S. dollar’s nascent weakness, gold hasn’t. Gold stocks in particularly have been exhibiting strength relative to their commodity brethren.

As a matter of fact, the Market Vectors Gold Miners ETF (GDX) is one of only a few funds that were able to end Friday’s bloodbath in the green.

The gold ETF counts such companies as Goldcorp (GG), Newmont Mining Corp (NEM), and Barrick Gold Corporation (ABX) among its top holdings. I suspect many traders are tiring of seeing their stocks plumb the depths alongside the S&P 500 day after day. Such behavior is the sad reality of owning correlated assets.

Which brings us to yet another reason to take a good look at GDX. It’s virtually uncorrelated to the stock market these days. Currently, GDX boasts a 10-day correlation to the S&P 500 of zero.

If the relationship holds, up further downside in stocks is unlikely to have any major effect on the next move in gold stocks.

GDX

Source: OptionsAnalytix

Further buttressing the case for strength in GDX stock is its continued bottoming bid. The price action in gold stocks has turned decidedly more neutral in recent months, healing some of the damage inflicted during its multi-year bear market.

While the 200-day moving average remains downward sloping, the 50-day has flattened out, confirming that the intermediate-term trend has at least based out in potential bottoming fashion.

Grab GDX Risk Reversals for Big Profits

The ideal play is selling GDX puts. If you think gold stocks really get uppity in the coming weeks, you could couple the naked put with long out-of-the-money calls to capture more upside.

Sell the Jan $14 put for 68 cents or better. And, if you really want to swing for the fences, buy two Jan $16 calls for 25 cents apiece. All told, the risk reversal strategy can be entered for 18 cents credit.

By selling the Jan $14 put, you obligate yourself to buy 100 shares of GDX if it sits below $14 at January expiration. Since you received 18 cents at trade inception, your cost basis on the stock would actually be $13.82 if you’re assigned.

The potential reward is unlimited due to the long calls. I would use any type of rally in GDX stock toward $16 as an opportunity to exit with profits in tow.

As of this writing Tyler Craig did not hold a position in any of the aforementioned securities.

More From InvestorPlace

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/lookin-diamond-rough-take-gander-gdx/.

©2024 InvestorPlace Media, LLC