Today's Trade - GDX

Today I will discuss a trade I made earlier in the week. My last trade analysis discussed SSRI, and today, my trade with GDX was very similar for similar reasons. I am becoming increasingly anxious about the state of the markets these days and I am moving out of overpriced positions into opportunities that tend to rise with the debasement of the USD.

Earlier this week I bought GDX. GDX is the gold miners ETF. Gold miners have lagged the run up in the price of gold, that is surely to be a temporary situation and we plan to take advantage of it. I don't want to go into an in depth analysis of gold miners, but they generally are expensive operations that have a fixed cost to pull gold out of the ground. As the price of gold increases, the profits of gold miners goes up dramatically which makes miners speculative due to their volatility.

But by spreading the risk across the industry with th ETF, we can smooth out a bit of the volatility. And with the printing presses in the US and many countries running at full steam, commodities like gold have no where to run but up.

I bought GDX this week at about $44/share. At the same time, I sold a corresponding number of $50/share call options with a September expiration for almost $3/share (I always use round numbers to simplify math). I also sold a corresponding number of $42/share puts options with a September expiration for about $4/share. So, to recap, I collected an immediate $7/share of premiums thus lowering my cost basis on GDX to $37/share.

That means GDX has to fall to below $37/share by September for me to lose money. As you can see, this significantly reduces my risk with GDX. Even if it is at or below $37/share by then, I will just sell another round of call options to collect more income and reduce my cost basis. If GDX is trading between $42-$50/share in September at expiration, then the call and put options expire worthless and I keep the premiums. I would then likely sell another round of options to collect additional premiums. If GDX is trading below $42/share in September, I will be required to be more shares based on the number of put options I sold. If GDX is above $50/share in September at expiration, I will be forced to sell my shares at $50/share thus collecting another $6/share in capital appreciation.

My risk here is that GDX falls about 16% by September. This is very low due to the current situation. For me, this was a very low risk, high reward trade.