2017 has been good to gold miners. The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) is up 20% since January. The mega rally in gold is adding to the exuberance in the mining companies.
Thanks to the collapse in the U.S. dollar, gold and anything that is denominated in dollars have had room to rally. This more often than not also invites buyers into gold miners. On Thursday, gold hit a 12-month high. While the GDX ETF is also rallying, it’s still -6% for that same period so it’s lagging from that perspective and that is weakness that I want to exploit.
Click to Enlarge Today I want to bet that the run is almost over in GDX. I think that the bond rally won’t last too much longer and if it doesn’t, the U.S. dollar is due for a rally. This should inflict downside pressure on gold and gold-related stocks. The ETF should then fall.
No, I won’t sell GDX short outright, as I would open my portfolio to unlimited risk. Instead I will use GDX options. There I can structure a setup that allows for balance and room for error.
Fundamentally, I don’t want to bet against gold for the long term. It’s a rare metal that is getting more rare, so its value should go higher with time. But for now I can trade the price action at hand.
Technically, the GDX is inside of 20% a rally in under two months. Now it’s approaching a long term pivotal level that is likely to be in contention. I do have to acknowledge that if the bulls prevail then there is even more upside in store off a measured move.
But I bet that the run is fading and I am willing to risk cautiously shorting it here. And since I am using options, I will leave a buffer zone in case I am wrong.
GDX EFT Trade Idea
The Bearish Side: Sell the GDX Jan $30/$31 credit call spread for 12 cents. This is a bearish trade that has an 80% theoretical chance that price will stay below my strike. If successful this trade would yield 14% on risk.
For balance I’d like to sell downside risk just in case price goes against my trade. I will do it lopsided meaning I will be more short than long for now.
The Hedge (Optional): Sell the GDX Jan $21/$20 credit put spread where I have an 85% theoretical odds to yield 14%.
Taking both trades and if the price stays in between both spreads then I would yield over 30% which are profits out of thin air.
Those with higher risk tolerance can sell naked options for even more profit potential but at a great dollars at risk.
The Alternate: Sell the Jan GDX $21 put/$30 call strangle. I collect 90 cents to open. This is a range-bound trade and if the price stays between both contracts sold then I retain maximum gains. Otherwise my breakeven points are $20.10 on the downside and $30.90 upside.
Since there are no guarantees when investing, especially when selling naked options, I never bet more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.