Tuesday, June 7, 2016

GDXJ Analysis

Update 7/5/2016: GDXJ rose sharply after the vote in the United Kingdom to leave the European Union, a flight to quality in the form of gold, pushing the price above the profit zone.

Shares rose by 18.7% over 28 days, or a +244% annual rate. The options position produced a 56.3% loss on debit for a -733% annual rate.

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 high implied volatility that is on the decline, a setup for a strategy that relies on shorting options spreads for a credit.

GDXJ's top three holdings as a percentage of the total portfolio are First Majestic Silver Corp. (AG),  Alamos Gold Inc. (AGI) and B2Gold Corp (BTG).

[GDXJ issuer page]


I shall use the JUL series of options, which trades for the last time 38 days hence, on July 15.


Implied volatility stands at 52%, which is 3.9 times the VIX, a measure of volatility of the S&P 500 index. GDXJ’s volatility stands in the 59th percentile of its most recent range. The price used for analysis was $38.22.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

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The Trade

GDXJ peaked in December 2010 and from that high fell to less than a 10th of the peak price, hitting its low point on Jan. 20 of the current year. It then rose to peak on May 17 at more than double the low, and the began to decline again, so far retracing nearly 38.2% Fibonacci level. In the last few days it has bounced back up toward the upside and is within $2 of its May 17 high.

Gold is being driven by bullish winds of late, as the U.K. votes June 23 on whether to leave the European Union (a leave vote would increase uncertainty and thus value of gold as a classic hedge).

In any case, it seems likely that the vote will behave much like an earnings announcement, with implied volatility dropping immediately after the results are known. That will be good for my net short options position.

As for the direction, iut's a political question with close polling so who knows what the voters will do. I shall take a neutral tack.

Iron condor, short the $43 calls and long the $44 calls,
short the $33 puts and long the $32 puts,
sold for a credit and expiring July 16.
Probability of expiring out-of-the-money


The premium is $0.35, which is 35% of the width of the position’s wings. The stock at the time of entry was priced at $38.41.

The risk/reward ratio is 1.9:1.

The zone of profit in the proposed trade covers a $5 move either way.

Decision for My Account

I have opened a position on GDXJ as described above.

-- Tim Bovee, Portland, Oregon, June 7, 2016


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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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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