Market Vectors Gold Miners ETF (GDX): The Shine Is on Gold Stocks

Gold stock lovers viewed Friday’s dollar drubbing as manna from Heaven.

Market Vectors Gold Miners ETF (GDX): The Shine Is on Gold Stocks

Its timing was fortuitous, its impact glorious. The plunging buck sent the Market Vectors Gold Miners ETF (GDX) into the stratosphere. By day’s end, GDX had climbed 11%.

And it wasn’t just gold bugs piling in. Based on the volume, which surpassed 190 million shares, it seems everybody was getting in on the action.

Prior to the pop, gold stocks were in the midst of a modest pullback, testing the 50-day moving average. Chart watchers view the 50-day moving average as a demarcation line of sorts. Once a stock falls below the average, it’s tossed into the ugly bin where only the bravest bulls pull stocks from.

Needless to say GDX sidestepped such a fate. Indeed with Friday’s rocket ship rise, the support test held, restoring order in the land of the yellow metal.


Source: OptionsAnalytix

While GDX has churned a bit in the days since, the $26 resistance level is calling, and I expect a retest in the coming days. Whether or not gold stocks succeed in breaching their prior ceiling, one thing is assured — option premiums are juiced. In a world of dismal implied volatility and cheap options everywhere, gold stocks are one of the last standouts actually rewarding premium sellers.

GDX Naked Puts Beckon to Sellers

A cursory glance at my ETF watchlist reveals GDX is the only fund boasting an implied volatility rank north of 50. For the uninitiated, traders prefer selling options when volatility is above the 50th percentile, as it signals option prices are on the high side of their one-year range.

That, plus the low price tag of GDX is making a naked put play quite attractive here. If you think gold stocks remain aloft, consider selling the July $22 put for 40 cents or better. The max gain is limited to the initial 40 cents and will be pocketed if the fund can remain above $22 by expiration.

By selling the put, you obligate yourself to buy 100 shares of GDX if it sits below $22 at expiration. If you find such a purchase unpalatable, simply buy to close the put if the ETF falls below $22 over the coming month.

At the time of this writing Tyler Craig owned bullish positions on GLD and GDX.

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