The dollar drubbing that ushered in the new year is lengthening its stride. And precious metal lovers are rejoicing. The buck’s weakness is propelling silver, gold and other metal-related products higher. Bullish setups are multiplying in everything from the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) to 3x leveraged gold exchange-traded funds Direxion Daily Gold Miners Bull 3X Shares (NYSEARCA:NUGT) and Direxion Daily Jr Gld Miners Bull 3X Shares (NYSEARCA:JNUG).
The absence of any leverage in GDX makes it the easiest product to play and analyze. Let’s dig into its chart to see if the technicals have turned adequately bullish to justify a trade.
Since bottoming before Christmas, shares of the GDX ETF are up an impressive 21.5%. The ascent has carried the golden fund above two pivotal resistance levels. Both ceilings proved impenetrable over the past six months, so the fact that gold stocks were able to sail through them this go around is a marked changed in character.
First up is the 50-day moving average which is used by chart watchers as a proxy for the intermediate trend. With the new year’s pop, GDX sliced through this line like a hot knife through butter.
Second is the descending trendline which has characterized its downtrend since last year’s mid-August peak. That too has been broken. The past week of sideways action has created a bull flag pattern, offering a lower-risk entry for spectators looking to capitalize on the potential bottom in miners.
Dive for Dough in GDX
With the recovery still in its infancy, I think a higher-probability trade is the way to go here. The cheap price tag of GDX makes it a prime candidate for naked puts.
Sell the Feb $20.50 put for around 45 cents. Consider it a bet that the gold stock ETF will remain above $20.50 for the next month. If it does, the puts will expire worthless allowing you to pocket the 45 cent credit. While $45 (45 cents x 100) may not sound like much, the initial margin required to sell the put should be around $250. So we’re talking about a respectable 18% return on your money here.
By selling the put, you obligate yourself to buy 100 shares of GDX if it sits below $20.50 at expiration. If you’re a willing buyer down there, then let the trade ride. Otherwise, buy back the put if GDX falls to $20.50 to minimize your loss while sidestepping assignment.
At the time of this writing, Tyler Craig owned option position in GLD.