Mining for a good entry in Market Vectors Gold Miners ETF (GDX)

On Thursday I had put on a lotto Put Spread trade in $GLD as it continued to show weakness. On Friday I was fortunate enough to get some good value out of the Long piece of the trade ($115 Put) and happened to catch the nice launch as buyers stepped in near the $115 level & bounced it to closed above $119.

Given the visibility into several very large trades in $GDX I have elected to plan for a new Long trade using Options and stock:

  • Long stock (current is 24.45) at 1/2 position
  • Short the July 12 weekly 24 Straddle at $2.21 (1/2 position). The Call closed at 1.38 & the Put at .83 on Friday

This trade design is something that I use more and more as it meets a key goal that I have for every trade: I want Flexibility. If the market tells me I am right, then awesome. If the market tells me I am an idiot, I say, ok, and adjust the trade.

The premise behind this setup is that my stock position size starts out at 1/2 so I can reduce/increase it at any time where appropriate. By selling the Straddle, with a few weeks to work it, I give myself a range of 21.79 to 26.21 on the Option pieces.

Here are a few potential scenarios that help illustrate how to work this trade:

1) The stock goes nowhere. Sounds good to me. The Option pieces will expire and I keep the premium collected (this lowers my cost basis if I remain Long the stock). I can then sell a new Straddle, Strangle, Call, Sell the stock, or do nothing.

2) The stock goes to $23 at expiration. In this scenario I will need to buy back the Short 24 Put, the Short 24 Call expires, and I am down $1.45 on the stock. I would likely adjust the Straddle down though, this is what I do the majority of the time to increase/reduce my cushion on a trade

3) The stock goes to $25 at expiration. In the scenario, I will need to buy back the Short 24 Call or the Long stock will get called away (sometimes I just allow this to happen). The Short 24 Put expires & I keep all premium collected (the gains on the trade minus the $.45 difference between stock entry & Short Call strike)

5 thoughts on “Mining for a good entry in Market Vectors Gold Miners ETF (GDX)

  1. Aren’t you just shorting volatility here? You nailed your ideal outcome which is the stock stops moving and you’re options go away @ the strike price worthless.

    But if the stock takes off you don’t participate in the upside b/c you’re called away and if the stock tanks you’re holding the bag on twice as much stock as you really want (i.e. long the underlying and then you’ll be put into more stock at expiration when that option is exercised).

    So is there more to the strategy than just selling expensive vol? (also I could be wong about positions sizing — I was assuming you’re matching # of calls/puts with # of stock, i.e. 100 shares would be 1 call / 1 put sold).

  2. All your questions are addressed in the post including being Put stock in one of the scenarios. Each piece is a 1/2 position so if Put stock (allow that) then I have a Full position. The cushion from selling premium provides a cushion.

  3. Your scenarios all envision pretty tame price movements (which i suppose is the point of selling a straddle) but you wouldn’t like the results with a spike in vol — i.e price shoots to $30 in a few weeks (you’ve surrendered all your upside) or tanks to $15 (you own twice as many shares now). I guess i don’t have a problem with the trade if selling vol is what you want to do, but if the trade motivation is something else, I don’t know if i’m 100% on board.

  4. There is a lot of thought put into strike selection, as any trader would do. As for the scenarios, they are very much inline with potential movements. This trade design works well for this because there isn’t going to be a flush to $15 – it isn’t a biotech. It isn’t waiting on FDA approval. A CEO isn’t going to be fired etc

  5. Perhaps. However I do seem to remember a period of time say.. 4/11 @ $35 where the price dropped to <30 within a week. Or on 6/14 going from $28 to $22 one week later.

    Is it likely to happen again… Probably not and hence why you're probably selling some fairly high premiums here, but to say that it couldn't happen is something that I couldn't say with certainty. It's not tied to a CEO or FDA Approval, however it's a levered bet on companies that are levered to one commodity which has shown to be quite volatile lately. (keep in mind these are companies borrowing money to dig something out of the ground, many of which announced with great fanfare that they are no longer hedging their production pipelines).

    Anyways, all I'm saying is that to construct a bullish position I think there are better ways to do it. And at the end of the day this is a bullish bet since the $5 pop works out a lot better for you than a $5 dive.

    Take care and Happy 4th of July!

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