As gold prices surge to records, two high-volatility opportunities emerge
The VanEck Gold Miners ETF (GDX) holds 58 stocks and primarily focuses on large-cap gold mining companies, while the VanEck Junior Gold Miners ETF (GDXJ) contains 82 stocks, targeting smaller, junior gold mining firms.
The top 4 stocks in GDX account for 39% of the ETF's total weight. These top holdings are:
Newmont (NEM)
Agnico Eagle (AEM)
Barrick Gold (GOLD)
On the other hand, the top 4 stocks in GDXJ make up 28% of the ETF's total weight — so a bit more diversification. These holdings are:
Alamos Gold (AGI)
Harmony Gold Mining (HMY)
Pan American Silver (PAAS)
Evolution Mining (EVN)
The Junior Miners (GDXJ) has considerably higher volatility, yet it has not historically moved much more than the GDX. For this reason, we lean toward the options in GDXJ.
Let's say you think the metals will go up. Should you buy gold or silver?
A Look at the Gold/Silver Ratio
This ratio measures the value of one ounce of gold relative to the value of one ounce of silver. Gold and Silver traders use this ratio to trade the products.
So here is the math:
Gold = $2926/ounce
Silver = $32.62/ounce
Therefore, 2926/32.62 = 89.69 ounces of silver, which is equal to the price of one ounce of gold.
If you think the ratio will continue to go up, then gold is cheap relative to silver. But if you think that the ratio will go down, then silver is cheap relative to gold.
This is one more tool that you can use to help to evaluate your trades.
Below we show the size of the gold and silver futures.
Gold futures (/GC) is worth just under $300,000 worth of gold. There is a lot of leverage, but it also is a large product. Keep that in mind when trading it.
Newmont is one of the biggest gold/metals miners in the world, and it has seen a bid alongside the upside in spot gold. With an IVR of 100, the current implied volatility is about as high as it's been during the last year. If you think the metals and miners might cool off a bit, or at least stay rangebound, the 45/50 strangle in March trades at $2.58 credit and only uses around $700 in buying power.
Costco is selling 100-200 million dollars worth of gold bars month over month! The stock is up almost 15% this year alone. If you think it might cool off a bit at the highs, a skewed iron condor is a way to play for some sideways/down movement. Selling a $10 wide 1000/990 put spread and a $20 wide 1120/1140 call spread provides some short delta with some short volatility.
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Michael Rechenthin, Ph.D., (aka “Dr. Data”), managing director of research and development, has 25 years of trading and markets experience. He’s best known for his weekly Cherry Picks newsletter. On Thursdays, he appears on Trades from the Research Team LIVE.
Nick Battista, tastylive director of market intelligence, has a decade of trading experience. He appears Monday-Friday on Options Trading Concepts Live. On Wednesdays, he co-hosts Johnny Trades. @tradernickybat
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