Market Pricing In A Big Move For GDXJ

ETFS

As followers will know, we like to sell high implied levels of volatility on liquid underlyings. Apart from stocks, we also like to sell premium in ETFs as they bring a distinct advantage to the mix. For example, ETFs do not have any quarterly earnings announcements which stocks have. This means that one has potentially far more trading opportunities with respect to selling options premium.

Binary events such as earnings announcements definitely limit the number of trading opportunities for option sellers. Why? Because an underlying’s implied volatility level usually increases aggressively as the stock approaches its earnings date. This is due to the market pricing in an aggressive move in the share price post the announcement. Remember as monthly options sellers, we get paid when implied volatility falls. This is why ETFs give more trading opportunities normally due to the absence of these routine binary events.

One such ETF which has high implied volatility (when compared to its normal ranges) at present is the VanEck Vectors Junior Gold Miners ETF (GDXJ) as shown on the chart below. We would be looking for a contraction here over a month to two month window. Let’s head to the charts to see if would go with long, short or neutral deltas on the trade.



Source: Interactive Brokers

If we go to the long-term monthly chart, we can see that price fell sharply before finally bottoming in early 2016. Shares of GDXJ rallied hard for the most part of 2016, but since then have been making lower highs and lower lows. What is interesting though is that price has now broken through its monthly down-cycle trend line. Furthermore, we also have a monthly swing low. This could mean we have a sustained rally coming. Let’s see what the weekly charts read.



What we look for invariably on the weekly charts are intermediate cycle lows. These (along with yearly lows) offer the best chance for substantial gains in long swing plays. As the chart illustrates below, GDXJ pretty much satisfies all the conditions for having started a brand new intermediate cycle.



  • We have a clear close above the intermediate down-cycle trend line.
  • We have a weekly swing low.
  • The last intermediate cycle ran 36 weeks, which means we were definitely in the timing band for a brand new intermediate cycle. If we are correct on our thesis, we should be starting week 3 of a broader new intermediate cycle this week.

Our portfolio is already long GDX and GLD. There are many ways we could play the upcoming contraction in implied volatility in GDXJ for example. The daily chart looks heavily overbought, so we are probably due a trip down into a daily cycle low here in the near term.



Possible trade strategies include covered calls, strangles or naked puts. We may favor some short deltas here though to take advantage of that expected near-term selling. Remember this implied volatility contraction trade has got nothing to do with our long swing play positions in this sector. Those long delta positions will not be touched until we see a clear intermediate high in the precious metals arena.

However, price rarely goes up in a straight line. Furthermore selling something like a covered call immediately increases our probability of profit on the trade due to the capping of the potential gain. Option prices in GDXJ are rich with premium at present, which is why we want to take full advantage.

We aim as much as possible to diversify our portfolio using different strategies and time frames. These implied volatility trades can take anything from a few days to a month to play out. We usually sell monthly expirations (which is no problem with a liquid ETF). We will post to the portfolio when the trade goes live.

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Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.

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Disclosure: I am/we are long GDX, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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