While the S&P 500 continues its slumber, gold stocks have awoken — big time. On Monday the exchange-traded fund Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) galloped higher by 7.7% in one of its largest up days in months. It seems like it was just yesterday that all things gold related were being monkey-hammered by traders slobbering over stocks.
But, as is usually the case, once the Street reached max pessimism, the tides turned. Let’s take a renewed look at GDXJ to discover how to play the space moving forward.
It’s worth noting GDXJ’s lower-volatility twin, the Market Vectors Gold Miners ETF (NYSEARCA:GDX), as well. Consider it a tamer version of GDXJ that tracks large-cap gold mining stocks. Both ETFs are fantastic ways to acquire exposure to gold miners. But if you’re looking for a higher beta play, GDXJ is the way to go.
Yesterday’s rousing rally carried the Junior Gold Miners ETF back above its 200-day moving average for the first time since November. Its price recovery has now risen high enough to reverse the 20-day and 50-day moving averages higher.
With the junior miners’ price trend now climbing on all time frames, you should view any and all price dips as buying opportunities.
The high volume accompanying Monday’s surge added legitimacy to the move. This wasn’t some weak-sauce breakout cobbled together by a few retail traders. No. It was an institutional-driven buying bonanza that is likely to continue propping up GDXJ for weeks to come.
A Golden Trade Idea for GDXJ
While we may see some mild profit taking in the days ahead as Monday’s move is digested, the time is ripe for bullish plays for gold miners. Due to its cheaper price tag and elevated volatility levels, GDXJ is as good a candidate as any for selling naked puts.
If you’re willing to bet the fund remains above $37 over the coming month, then sell the March $37 put for 90 cents or better. The max gain of 90 cents will be captured if the put sits out of the money.
By selling the put, you obligate yourself to buy 100 shares of stock if the put sits in-the-money at expiration. If you’d prefer to sidestep assignment, simply exit the trade if GDXJ falls below $37.
The $90 reward (90 cents x 100 shares) may not sound like a lot, but if you’re trading in a margin account, the initial margin should be around $350, so the return on initial investment is an impressive 26% ($90/$350).
At the time of this writing, Tyler Craig owned neutral option positions on GDXJ.