GDXJ Analysis

Update 11/10/2016: GDXJ became profitable as expiration approached  and I exited, at 23% of my maximum potential profit, less than my 50% goal.

Shares rose by 0.7% over 36 days, or a +7% annual rate. The options position produced a 30.0% yield on debit for a +304% 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 high implied volatility, making it a candidate for a volatility play using options spreads.

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]

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GDXJ

I shall use the NOV series of options, which trades for the last time 44 days hence, on Nov. 18.

Ranges

Implied volatility stands at 56%, which is 4.3 times the VIX, a measure of volatility of the S&P 500 index. GDXJ’s volatility stands in the 77th percentile of its annual range. The price used for analysis was $38.27.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	45.66	53.05	N/A
Lower	30.87	23.48	N/A
Gain/loss	±$7.39	±$14.78

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

GDXJ has fallen sharply since I last analyzed it in mid-September, part of a decline that began Sept. 21 and is now in its 2nd downward leg.

I shall structure the trade as a bear play.

Bear call spread, short the $40 calls and long the $41 calls,
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money

nov	Strike	OTM
	40	63.1%

The premium is $0.65, which is 33% of the width of the position’s wings.

The risk/reward ratio is 2.1:1.

The short strike is $1.58 above the current price.

Decision for My Account

I have entered a position on GDXJ.  The stock at the time of entry was priced at $38.16.

-- Tim Bovee, Portland, Oregon, Oct. 5, 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.

License



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Based on a work at www.timbovee.com.