Shares declined by 3.3% over 24 days, or a -50% annual rate. The options produced a 108.3% yield on debit, for a +1,986% annual rate.
The Market Vectors Gold Miners exchange-traded fund (GDX), which tracks the NYSE Arca Gold Miners Index, closed above its 20-day price channel on Monday, sending a bull signal with low historical odds of success, suggesting a non-directional trade.
[Largest gold companies in Wikipedia]
GDX
I shall use the NOV series of options, which trades for the last time 45 days hence, on Nov. 20.
GDX has completed three bull signals in the past year. The one successful signal yielded 1.9% over 36 days. The two unsuccessful signals lost 8.6% over 23 days.
The success rate is 33.3%, suggesting a short iron condor as the best strategy.
Implied volatility stands at 52.6%, which is 2.7 times the VIX, a measure of volatility of the S&P 500 index. GLD’s volatility stands in the 67th percentile of its annual range.
My normal price cut-off in screening is $20, so GDX is a bit low. But let's give it a try anyhow.
short the $13 puts and long the $12 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money
| NOV | Strike | OTM |
|---|---|---|
| Upper | 18 | 80.8% |
| Lower | 13 | 81.6% |
The premium is $0.25, which is 1/4th the width of the position’s wings. The stock at the time of purchase was priced at $15.71.
The risk/reward ratio is 3:1.
The zone of profit in the proposed trade covers a $2.50 move either way, or 3.9 times the average true daily range.
Decision for My Account
I've opened a position in GDX as described above.
-- Tim Bovee, Portland, Oregon, Oct. 6, 2015
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
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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.License
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Based on a work at www.timbovee.com.
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