The low-volatility fog settling over the landscape has yet to infiltrate gold stocks and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). And that means there’s opportunity in the offing.
These days, it’s tricky to find a broad market fund boasting anything near high implied volatility. Sure, yesterday’s early morning market drop delivered a sudden volatility uptick, but it fizzled into the close. Until sellers sink their teeth into this market, expect options demand to remain subdued. Fortunately, GDXJ is moving to the beat of a different drum and currently offers option contracts worth selling.
Read on for an in-depth GDXJ analysis and an interesting trade idea to exploit the lofty volatility
For the uninitiated, the fund is designed to track micro-cap and small-cap gold mining stocks. As a result of these more speculative holdings, we’re talking about a high-octane fund that knows how to move. Since carving out its 52-week low in December, GDXJ is up 32%.
Not bad for six weeks of work.
The bulk of the gain came in two weeks. Since then, the fund has been drifting sideways.
Though its implied volatility has receded from its recent peak, it remains elevated. With an implied volatility rank of 49%, GDXJ boasts the most expensive options of any ETF in my watchlist.
Strangle that GDXJ Volatility
If you don’t have a directional opinion on gold stocks over the coming month, the easiest way to capitalize on the juiced-up options is selling strangles. The short strangle consists of selling to open an out-of-the-money call option and out-of-the-money put option. It’s a neutral trade that profits if the underlying security remains in a trading range.
With GDXJ around $37, you could sell the March $44 call and March $31 put for a net credit of $1.20. Consider it a bet that the ETF sits between $31 and $44 at March expiration. Since you received $1.20 credit, the breakevens for the trade (at expiration) are $29.80 and $45.20 which creates a very wide profit zone.
You could ride the position to the end and allow the options to expire worthless if GDXJ remains in the profit range. The higher-probability route, however, is to close down the trade when you’ve made most of the gain. I suggest exiting if you can buy back the strangle for around 50 cents.
To minimize the loss, you could exit if GDXJ rises or falls to either expiration breakeven price.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.