Massive Options Trade Signals Gold Miners (GDX) Is Set to Glitter

My Options Radar was buzzing late in the day following a massive trade in the Gold Miners (GDX) ETF.

Trade Breakdown:

Gold Miners (GDX) saw a very large institutional player come in yesterday with a large trade that hit the ISE at 3:55pm when 30,000 September $28 puts were sold close to the bid; while 20,000 September $35 calls traded at $4.66 skewed slightly to the offer side, likely a buyer, and 30,000 September $45 calls were sold for $1.48 near the bid.

With the GDX trading right near $35, you can look at the trade two ways, either a ratio bullish call spread financed partially via put selling, or a 30,000 contract strangle sold with the premium collected used to purchase 20,000 September $35 calls. The trader collected $1.48 on the Sep. $45 calls and $1.72 on the September $28 puts for a credit of $3.20, while spending $4.66 for the Sep. $35 calls. Total comes to a $9.6 million credit and a $9.32 million dollar purchase, so a credit of $280,000.

Now to look at the strategy and risk reward of the trade; the trader is taking a very bullish stance with a large profitability zone, as a move above $35 makes the trade profitable (losses begin to mount under $27.90), with max profits at $45 of $2,025 per spread, with a max move of shares to $65.30 before losses would occur due to the ratios.

Technical Analysis:

The GDX has been making higher lows and broke past a 20 day high today and a bullish trend appears to be developing. Simple trend lines would show $32 as support with $42.50 as the target on the next move higher, a very favorable risk/reward set-up. Gold (GLD), the commodity, has formed a descending triangle and is nearing a breakout at $900/oz. These bullish technical signals could account for this large bet on the GDX.

Behind the Story:

U.S. Gold companies could benefit from a stronger USD as many operate outside the U.S. and thus costs are reduced. The reason that individual gold stocks and the gold mining ETF are likely a better bet than the commodity itself, is due to the much lower input costs (Steel, Oil, etc.) for these mining companies that should boost margins, and thus profits.

I would rather not get into a deep discussion regarding the fundamentals because the smart money knows that this group of stocks is set to flourish, and I will leave it open to discussion in the comments as to the Bullish and / or Bearish cases for the gold miners.

Large holdings in the GDX include Agnico-Eagle Mines (AEM), AngloGold Ashanti (AU), Barrick Gold (ABX), Eldorado (EGO), Gold Fields (GFI), Harmony Gold Mining (HMY), Goldcorp (GG), Newmont Mining (NEM), Yamana Gold (AUY). These individual names are also worth buying on this breakout about to occur.

Disclosure: No Current Holdings, but considering some individual mining names, likely speculative names like JAG and NXG.

Comments

[billyboy54:]

I have certainly noticed the almost "stealth" buying of gold and gold mining stocks, under "cover" of the recent equities rally.

I expect that once this bear market rally runs out of steam, the PM ETFs and stocks will rocket in the opposite direction of equities, except for energy, which will move in sync with PMs.

My money is where my mouth is, and my portfolio is up 20% YTD, due to LARGE PM holdings.

May 05 10:34 AM

[Lee Eugene ...:]

Hey Joe,
Glad to see you covering this topic. I have been trading AU for a while, but everything is just going sideways right now. I agree that GDX could be a great vehicle if it breaks out on some volume, but for now I am just stalking it and the other individual names in the group. If GLD can brake $90 and volume on GDX improves . . .
Lee

May 05 04:01 PM

[doubleguns:]

Once we have failue at the treasury bond offerings PM will surge too.

May 05 04:22 PM

[sewells:]

What I see in GLD is a series of lower highs and lower lows for the most part over the last 3 months. I do see gold going higher longer term but I think a correction, possibly to as low as 775, before that happens. At least that is the way I'm investing. So, I guess we agree to disagree on the short term and agree in general in the longer term.

May 05 04:52 PM

[Francis Sch...:]

What we had over the last 3 months, was an UP FLAG (and such a formation has lower highs and lower lows). Note that not only the GLD options are heavily bought. The same occurs with Gold and Silver Comex options...it smells like something is in the make!

May 05 08:35 PM

[Bruce Pile:]

Don't look now, but silver just broke its bull flag pattern to the upside today. Gold and silver technicals seem to be signaling a big move soon either up or down - a lot of pent up energy ready to blow down or up.

The stock market rally detractors are assuming any bull move in silver automatically means a stoppage of the bull move in stocks. People are either fearful and buy PM or bold and buy stocks, right?. But let me point out that it is entirely possible for gold, silver, and the stock market to all move lovingly together in a raging bull market! Impossible you say? Well you need to look no further than our last big bear decline in '01-'03 to find an example of this. Look at what silver did from mid '01 to mid '04 and you see that it was in a mild climb channel during the bear market. But then, as we emerged into the stock bull market in early '03, silver moved into a much steeper climb into '04! Gold's action was similar.

That makes sense when you consider that, in the present case, you have the same 800 lb gorilla causing both the economic "recovery" and the dire threat of out of control inflation soon - namely the massive flood of fiat dollars.

May 05 10:37 PM

[unclesteve:]

Write your own article please allow all of us to comment on it as you do.


On May 06 04:39 AM SOMALIA? wrote:

> No position expert, fuck you.
> Miners? Glitter like what?
> Like shit.

May 06 05:36 AM

[Joe Kunkle:]

GDX up 14.3% in 5 trading days...

May 13 10:36 AM

[Tradesmarter:]

trade options of gold related options is climbing,
just now GDX seems like oversold in an uptrend.
any other ideas of gold options trading guys ?

Jun 25 09:11 AM