Gold stocks have been all the rage this year. The go-to fund for gold-miner exposure, the Market Vectors Gold Miners ETF (GDX), is up 75%, besting the performance of virtually everything else. The sudden strength comes following a bear market of epic proportions ravishing the mining space.
Before this year’s sharp ascent, GDX had fallen 81% from its peak. So the shiny fund has mountains to climb before it ever returns to its former glory.
But, hey, it’s off to a rousing start here. On the price front, the action in gold stocks is solid. GDX sits firmly in an uptrend above all major moving averages. It’s risen far enough to turn the 200-day moving average higher, which is saying something given how long it’s been declining.
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The momentum of its trend is increasing as well. Monday’s pivot high was confirmed by a higher high in the popular RSI indicator providing a bullish signal for GDX owners.
Spectators loath to chase will be happy to note gold stocks are descending this week amid profit-taking across the sector.
Thus far, the dip is a garden variety pullback, leaving little by way of warning signs. Retracements in uptrends are always welcome developments, as they provide lower risk entries for buyers.
GDX could drop another dollar or so before testing its 20-day moving average, but it’s definitely in a buy zone now.
Turn Gold to Cash With GDX Options
While implied volatility has remained subdued through much of the market, it’s quite elevated in GDX options. In fact, the gold miners exchange-traded fund boasts the second highest implied volatility rank for all actively traded funds. Which means traders are still getting paid to step up and sell options in gold stocks.
The low price tag of GDX coupled with the high implied volatility is presenting an attractive put selling opportunity.
Sell the June $21 put for 56 cents or better. Your reward is limited to the initial 56 cents and will be captured if GDX sits above $21 at expiration. By selling the put, you obligate yourself to buy 100 shares of the gold stock ETF if it sits below $21 at expiration.
Due to the initial 56 cent credit received, your cost basis would be $20.44. If acquiring shares of GDX at that price doesn’t interest you, simply buy back the put if it’s in-the-money at expiration.
In timing the entry of the trade, consider waiting until GDX shows signs of reversing higher before selling the put.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
