This morning, I am recommending another cheap, bullish trade to take advantage of rising gold prices. This time, I’m recommending a ratio call debit spread on the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX).
I am still bullish on the metals, particularly gold and silver. Even with the value of the U.S. dollar remaining elevated, gold has continued its breakout, and last week, it rose to just under the $1,450 per ounce level.
Gold is Establishing Support at Recent Resistance
In the past few weeks, gold struggled to stay above the $1,420 level, but last week it jumped to just under $1,450. While it fell back down the next day, it stayed above its old resistance level. My regular readers know that old resistance often becomes new support, and it looks like investors were willing to keep gold above $1,420.
Daily Chart of Gold — Chart Source: TradingView
As the price of gold goes up, gold miners can charge more for the material they mine and refine. Any push higher is bound to help increase profits for gold mining companies. Using an exchange traded fund (ETF) like GDX means we don’t need to pick a specific stock, and ETFs tend to experience less dramatic price shifts. That increases our chance to take profits as the ETF increases in value.
Following Gold Higher
The chart for GDX shows that as the price of gold has gone up, the ETF has followed. After gold broke above $1,420 last week, GDX pushed above $27. As gold pulled back on Friday, GDX dropped below $28.
Daily Chart of VanEck Vectors Gold Miners ETF (GDX) — Chart Source: TradingView
The push into gold doesn’t show any signs of slowing down. A U.S.-China trade deal is still months away, if one ever materializes, and investors need a safe place to put their capital in the interim. Gold and the other precious metals seem to have taken on that role, which is great for gold miners.
Using a ratio put debit spread, we can take a cheap position on GDX, and that’s exactly what I’m recommending this morning.
Using a spread order, buy to open 1 GDX Nov. 15th $29 call and sell to open 2 GDX Nov. 15th $32 calls for a net debit of about $0.10.
Note: Be sure you are opening the monthly GDX options that expire on Friday, Nov. 15, 2019.
About Ratio Debit Spreads
A ratio debit spread is simply a way to lower the cost of buying options, as the two options that you sell to open (short) help offset the cost of the option that you buy to open. Therefore, this ratio call debit spread is a way to lower the cost of establishing a bullish call option trade. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a ratio debit spread; contact your broker directly for specific requirements.
Because you are short a naked call in this ratio call debit spread, one risk is that the underlying stock could unexpectedly move up sharply. If that happens, we would need to buy back to cover and close the naked call option for a loss.
The other risk due to the naked call is if the stock moves up sharply the call could be assigned. This means that for every 1 call option we sold to open (shorted), we would need to buy 100 GDX shares on the open market at an unknown higher price and then sell the shares at the $32 strike price for a loss. So, this is inherently a higher risk play. Keep your positions small.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.