Wednesday, July 6, 2016

GDX Analysis

Update 8/2/2016: GDX rose in lockstep with gold and reached my minimum targets price, which is 50% of the maximum earnings. I exited.

Shares rose by by 3.34% over 27 days, or a +45% annual rate. The options position produced a 100.0% yield on debit for a +1,352% annual rate.

The Market Vectors Gold Miners exchange-traded fund (GDX), which tracks the NYSE Arca Gold Miners Index, closed on Tuesday with implied volatility above the 50th percentile of its annual range, making it potentially eligible for a trade.

[Largest gold companies in Wikipedia]


I shall use the AUG series of options, which trades for the last time 44 days hence, on Aug. 19.


Implied volatility stands at 49%, which is three times the VIX, a measure of volatility of the S&P 500 index. GEX’s volatility stands in the 55th percentile of its annual range. The price used for analysis was $30.07.

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

Elliott Wave Principle
by Robert Prechter

The Trade

GDX has been stairstepping higher since January, with only shallow retracements. The most recent leg up began June 22. Using Elliott wave analysis as a frame, I read this year's upward movement as being a countertrend correction within a downtrend that began in September 2011.

Specifically, for those who have studied Elliott, the downward movement since 2011 is a wave A in a very large correction. The present uptrend is wave B of the correction. Under Elliott doctrine, it won't exceed $66.98, the point at which wave A began. However, typically a B wave will retrace between the 38.2% and the 78.6% Fibonacci levels, giving a range of $33.25 and $55.30.

In other words, Elliott wave analysis says the price is rising and it has a ways to go.

On that basis, I shall use a directional strategy.

Bull put spread, short the $29 puts and long the $28 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

The premium is $0.36, which is 36% of the width of the position’s wing. The stock at the time of entry was priced at $30.53.

The risk/reward ratio is 1.7:1.

The zone of profit in the proposed trade extends a $1.53 below the entry price

Decision for My Account

I have opened a position on GDX as described above.

-- Tim Bovee, Portland, Oregon, July 6, 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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