GDXJ Analysis

Update 9/30/2016: I exited GDXJ after it reached 50% of its potential profit. The spread was wide enough that I had to drop the bid to 33% of potential in order to get a fill.

Shares declined by 0.3% over 16 days, or a -6% annual rate. The options positions produced a 50.0% yield on debit for a +1,141% annual rate.

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Market Vectors Junior Gold Miners (GDXJ) exchange-traded fund, which small -and mid-cap companies that earn at least half of their revenue from gold and silver mining, has implied volatility in the upper half of its one-year range and qualifies for a full analysis.

GDXJ's top three holdings as a percentage of the total portfolio are B2Gold Corp (BTG), Alamos Gold Inc. (AGI) and Hecla Mining Co. (HL).

[GDXJ issuer page]

GDXJ

I shall use the OCT series of options, which trades for the last time 37 days hence, on Oct. 21.

Ranges

Implied volatility stands at 55%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. GDXJ’s volatility stands in the 74th percentile of its annual range. The price used for analysis was $45.59.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	53.59	61.59	N/A
Lower	37.59	29.59	N/A
Gain/loss	±$8.00	±$16.00

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

GDXJ declined from an Aug. 11 peak, bounced in a retracement of more than half the drop, and began to decline again, although it remains above the most recent lowest low.

Chart Patterns: After the Buy by Thomas N. Bulkowski

Zacks Investment Research is neutral gold.

My own assessment of the chart is neutral to bearish. Given the ambiguities, I shall go with a directon neutral strategy.

Iron condor, short the $52 calls and long the $53 calls,
short the $38 puts and long the $37 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money

OCT	Strike	OTM
Upper	52	80.3%
Lower	38	82.0%

The premium is $0.30, which is 30% of the width of the position’s wings.
The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $7 move either way.

Decision for My Account

I've entered a position on GDXJ as described above. The stock at the time of entry was priced at $45.16.

-- Tim Bovee, Portland, Oregon, Oct. 14, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.