Breaking News
0

The Siren Song Of Gold Stocks

By Jay KaeppelStock MarketsFeb 13, 2018 01:36PM ET
www.investing.com/analysis/the-siren-song-of-gold-stocks-200289974
The Siren Song Of Gold Stocks
By Jay Kaeppel   |  Feb 13, 2018 01:36PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Few securities hold the mystical lure that gold stocks seem to possess. The seeming never ending allure of gold as the ultimate “store of value” (whatever that means) and the volatile nature of gold stocks themselves create a combination that draws in traders and speculators – often not unlike a moth to the flame.

The History

Figure 1 displays a 5-stock index that I created as a proxy to track the gold stock sector. Whether this is the “definitive” gold stock index or not (it’s not) is not the point. The point is that, clearly, if you get on the right side of a big move there is money to be made.

5-Stock Gold Sector
5-Stock Gold Sector

Figure 1 – Gold stocks have a history of making big moves; currently coiling in a relatively tight range (Courtesy AIQ TradingExpert)

The Here And Now

As you can also see in Figure 1 at the far right is the fact that gold stocks are mired in an exceptionally tight range. The obvious question is, “will the breakout be to the upside or the downside?” I don’t claim to know, but based on what I wrote about here my expectations for commodity prices in the next several years, I might be willing to bet that the breakout will ultimately be to the upside.

The key item in the linked article is the chart in Figure 2 below that shows the ratio between the Goldman Sachs (NYSE:GS) Commodity Index (GSCI) and the S&P 500 (SPX). Commodity prices were recently about as low as they have ever been in relation to stock prices. This type of extreme is typically followed by a major advance in commodity prices.

GSCI/SPX Ratio
GSCI/SPX Ratio

Figure 2 – GSCI/SPX Ratio (Source: Dr. Torsten Dennin, Incrementum AG

One Way To Play

So let’s assume someone wants to play the bullish side in the months ahead. The most straightforward approach would be to buy 100 shares of ticker GDX (a gold stock ETF). As I write 100 shares of GDX would cost $2,197. Let’s consider a less costly alternative. For the record – and as always – the position highlighted below is not a “recommendation” only an “example” for educational purposes. This example trade involves:

*Buying 2 Jun2018 22 calls @ 1.61

*Selling 3 Jun2018 25 calls @ 0.62

*Buying 2 Jun2018 28 calls @ 0.26

The particulars appear in Figure 3 and the risk curves in Figure 4.

GDX Directional Butterfly Spread
GDX Directional Butterfly Spread

Figure 3 – GDX Directional Butterfly Spread (Courtesy www.OptionsAnalysis.com)

GDX Directional Butterfly Spread Risk Curves
GDX Directional Butterfly Spread Risk Curves

Figure 4 – GDX Directional Butterfly Spread Risk Curves (Courtesy www.OptionsAnalysis.com)

As you can see this trade has:

*123 day left until expiration

*Unlimited profit potential

*Maximum risk of -$388. A trader could choose to cut his or her loss if support is taken out near $20.20 a share.

*A “delta” of 96 – which means that the trade will behave roughly like a position that involves holding 96 shares of GDX.

Summary

Once again I must reiterate that this trade is not a recommendation. It is intended solely as an example of one way to:

*Play a bullish outlook (assuming you have one) for gold stocks over the next four months (so note that if no up move unfolds in the next four months this trade could lose 100%).

*While investing and risking less than it would cost to buy 100 ETF shares.

Addendum

The latest risk curve for the example trade I wrote about here appears below. This trade can benefit from either a big price move up, a big price move down and/or an increase in volatility.

GDX “Volatility Bomb” Example Trade
GDX “Volatility Bomb” Example Trade

Figure 5 – GDX “Volatility Bomb” example trade

As you can see in Figure 6, implied volatility or options on GDX (black line) rose sharply in recent days (which actually pushed this example traded into profitable territory). There is still plenty of “upside” left for volatility and GDX just reversed back to the upside at support.

GDX With Implied Option Volatility
GDX With Implied Option Volatility

Figure 6 – Ticker GDX with implied option volatility (black line) (Courtesy www.OptionsAnalysis.com)

The Siren Song Of Gold Stocks
 

Recommended

The Siren Song Of Gold Stocks

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email