Golden Bulls: Target the GDX

by Tyler Craig | August 30, 2012 8:38 am

The recent bullish festivities in silver (NYSE:SLV[1]) and gold (NYSE:GLD[2]) have grown to envelope the gold mining space as well.

Since successfully testing support in the $40 area and forming a price pattern many chart watchers would call a double bottom, the Market Vectors Gold Miners ETF (NYSE:GDX[3]) has reversed into a short-term uptrend accompanied by a rising 20-day moving average. During the past five trading sessions, a mild bout of profit-taking has caused the formation of a shallow pullback, which appears to be providing a low-risk entry point for new bullish positions.

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One wildcard likely to impact gold mining stocks is Ben Bernanke’s upcoming speech Friday morning in Jackson Hole, Wyo. The latest advance in the gold space was likely driven in part by renewed hopes for another round of quantitative easing spurred by last week’s release of the most recent Fed meeting minutes.

If Wall Street perceives Bernanke’s commentary to be supportive of additional rounds of stimulus, then the bid beneath gold, silver and other inflation-related assets is likely to remain in place. Of course, if he fails to deliver, the relatively nascent run in GDX could see the rug pulled out from under it.

Traders looking for bullish exposure in GDX might consider selling the October 43-38 bull put spread, which consists of selling the Oct 43 put while buying the Oct 38 put. The initial credit (72 cents at the time of this writing) received at trade entry represents the maximum reward and will be captured provided the put options remain out-of-the-money at expiration. The max risk is limited to the distance between strikes minus the net credit ($5 – $0.72 = $4.28) and will be incurred if the stock sits beneath $38 at expiration.

In timing the entry, traders should wait for confirmation that the pullback in GDX has terminated and the next upswing has begun. With GDX trading at the lows of its trading session thus far on Wednesday, such a signal has yet to materialize.

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

  1. SLV:
  2. GLD:
  3. GDX:

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