The gold complex experienced notable weakness as 2011 came to a close last week.  Not surprisingly, the selling pressure also come home to roost in gold mining stocks as the Market Vectors Gold Miners ETF (NYSE:GDX) breached a key longer-term support level around $52.

Despite the snapback rally in GDX over the past few days, it continues to look vulnerable and may be ripe for selling call spreads.

Source:  MachTrader

The short call spread, sometimes referred to as the bear-call spread or a call credit spread, is can be entered by “selling to open” a lower-strike call and “buying to open” a higher-strike call in the same expiration month.

To exploit the higher rate of time decay inherent with short-term options, most traders enter bear-call spreads using options that are one or two months away from expiring.

To exploit continued weakness in GDX — or at least its inability to rise much further from current levels — you could sell the GDX Feb 58-63 call spread by simultaneously “selling to open” the Feb 58 Call and “buying to open” the Feb 63 Call for a net credit around 72 cents.

In doing so, it doesn’t matter exactly how much you collect for the option you sell or what you pay for the option you buy, as long as you pocket at least 72 cents on the trade in its entirety.

The max reward is limited to the initial $72 received at trade inception (72 cents x 100) and will be captured as long as GDX remains below $58 by February expiration.

The max risk is limited to the distance between strike prices ($63 – $58 = $5) minus the net credit, or $428.

In timing the trade, you should wait until the current rally in GDX exhausts itself.  You may consider using a break below the prior day’s low as your trigger price for entering.

At the time of this writing Tyler Craig had no positions in GDX.