Gold prices rallied yesterday on the heels of President Donald Trump warning Russia of a potential missile strike in Syria. Investors are also bidding up gold miners, driving the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) higher by as much as 3.5% in early morning trading.
Implied volatility is rising alongside precious metals showing a sharp rise in demand for options on GDX and the SPDR Gold Shares (NYSEARCA:GLD). Whether or not the knee-jerk jump has legs remains to be seen, but it’s worth re-assessing the space to see what kind of trades we can build to profit from any additional “fear spikes” in precious metals.
Gold bugs have been in desperate need of a positive catalyst for years now — especially in gold mining stocks. At $23, GDX sits in the same spot it was in May 2013. That’s five years of traveling a circuitous route to nowhere. And it’s not like shareholders have been showered with dividends in the meantime. GDX boasts a paltry dividend yield of 0.8%.
The past year of the merry-go-round has seen the fund stuck in a tight box between $21 and $25.50. While we’ve had numerous breakout attempts, nothing has been able to shake GDX out of its stupor. Today’s jump, while robust, is merely returning prices to the middle of the range, so we’re still far from an upside breakout.
Nonetheless, continued strength from gold could propel GDX towards the upper end of its range near $25 over the weeks ahead. Here’s a trade idea to bank on such an outcome.
GDX Risk Reversals
If you’re comfortable betting GDX remains above $22 and want to carry an upside kicker if it ramps higher then consider this risk-reversal trade. Sell the June $22 put for 60 cents and buy two June $25 calls for 35 cents apiece. The whole deal can be entered for a net debit of 10 cents.
Essentially, we’re selling a naked put and using the premium received to purchase a pair of out-of-the-money calls. The primary risk in the position is the short put, so consider closing it if GDX breaks major support at $20.80.
As of this writing, Tyler Craig held bullish options positions in GLD. Want more education on how to trade? Check out his trading blog, Tales of a Technician.