My Options Radar was buzzing late in the day following a massive trade in the Gold Miners ETF.
Trade Breakdown
Gold Miners (GDX) saw a very large institutional player come in yesterday with a large trade that hit the ISE at 3:55pm when 30,000 September $28 puts were sold close to the bid; while 20,000 September $35 calls traded at $4.66 skewed slightly to the offer side, likely a buyer, and 30,000 September $45 calls were sold for $1.48 near the bid.

With the GDX trading right near $35, you can look at the trade two ways, either a ratio bullish call spread financed partially via put selling, or a 30,000 contract strangle sold with the premium collected used to purchase 20,000 September $35 calls. The trader collected $1.48 on the Sep. $45 calls and $1.72 on the September $28 puts for a credit of $3.20, while spending $4.66 for the Sep. $35 calls. Total comes to a $9.6 million credit and a $9.32 million dollar purchase, so a credit of $280,000.

Now to look at the strategy and risk reward of the trade; the trader is taking a very bullish stance with a large profitability zone, as a move above $35 makes the trade profitable (losses begin to mount under $27.90), with max profits at $45 of $2,025 per spread, with a max move of shares to $65.30 before losses would occur due to the ratios.

Technical Analysis:

The GDX has been making higher lows and broke past a 20 day high today and a bullish trend appears to be developing. Simple trend lines would show $32 as support with $42.50 as the target on the next move higher, a very favorable risk/reward set-up. Gold (GLD), the commodity, has formed a descending triangle and is nearing a breakout at $900/oz. These bullish technical signals could account for this large bet on the GDX.

Behind the Story:

U.S. Gold companies could benefit from a stronger USD as many operate outside the U.S. and thus costs are reduced. The reason that individual gold stocks and the gold mining ETF are likely a better bet than the commodity itself, is due to the much lower input costs (Steel, Oil, etc.) for these mining companies that should boost margins, and thus profits.

I would rather not get into a deep discussion regarding the fundamentals because the smart money knows that this group of stocks is set to flourish, and I will leave it open to discussion in the comments as to the Bullish and / or Bearish cases for the gold miners.

Large holdings in the GDX include Agnico-Eagle Mines (AEM), AngloGold Ashanti (AU), Barrick Gold (ABX), Eldorado (EGO), Gold Fields (GFI), Harmony Gold Mining (HMY), Goldcorp (GG), Newmont Mining (NEM), Yamana Gold (AUY). These individual names are also worth buying on this breakout about to occur.

source : Seeking Alpha

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