After it’s impressive rally for the first eight months of the year, the price of gold has taken a breather and has started to fall in price. Use this temporary drop to initiate a simple stock substitution options trade that targets over 100% gains by January.
Gold Mine …
A modest move back to the September 26th level of just two weeks ago in this Exchange Traded Fund would produce a nearly 100% gain using the limited risk option trade presented in this article. And with more than three months for this move to occur, there is plenty of time for a bullish development after this price pullback.
After a remarkable recovery rally run, metal and mining stocks have stalled but remained stable. Market moves of greater than 100% in mere months from the January extreme lows saw nearly straight up moves until summer.
Go Go Gold, as measured by the GLD ETF, rallied 20% in 2016 with a reversal from the multi-year December extreme lows. The comeback marked a trend change after the downturn from 2011 all time highs above $1,900 per ounce.
A Gold fall below the $1,300 support level can be attributed to recent U.S. Dollar strength as a December rate hike looms large.
Gold Miners can hit the mother lode when this near-term commodity crisis stabilizes…ala Oil’s return to the top after a price pause.
GDX the Gold Miners ETF has outperformed the metal itself peaking at a 100% gain from the bottom. The GDX instrument is made up of 10% Newmont Mining and Barrick Gold as the largest individual stocks in the ETF.
GDX traded between $12 and $32 in the last year of trade. This price pullback puts the reward to risk in favor of the bulls at the halfway mark of the last 52 weeks. Look for the upside price gap to get closed and GDX to return to the $26 to $28 September sideways range
Lean on the $22.00 midpoint on a weekly basis as a support point to watch.
Let me show you how a modest move back to the $28 level from the end of September would see nearly a 100% gain using the right limited risk option. This proposed play also has lower investment costs and less dollar risk than buying the GDX ETF shares outright.
SIMPLE STOCK SUBSTITUTION STRATEGY
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long-term trend development.
Using a January option contract gives us three months for a bullish development to occur.
An In-The-Money option gives you the right to long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A GDX long call option can provide the staying power in a potential bullish trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
With GDX trading at $23.15, for example, an In-The-Money $20.00 strike option currently has $3.15 in real or intrinsic value. The remainder of any premium is the time value of the option.
Trade Setup: I recommend the GDX January $20.00 Call at $4.25 or less. A loss of half of the option premium would trigger a position exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta on the $20.00 strike call is 78% meaning that for every $1 move in GDX the option moves nearly 80 cents.
The January option has more than three months for bullish development. This option is like being long on the stock from $20.00 with completely limited risk. GDX was last down at the $20.00 discounted level in April.
The maximum loss is limited to the $425 or less paid per option contract, with the upside potential, on the other hand, unlimited. A stop loss is placed at $200 for cash management purposes.
The GDX option trade break even is $24.25 or less at expiration ($20.00 strike plus $4.25 or less option premium). That stands just $1 above the current GDX price.
Use the power of options to potentially double an investment in GDX with a maximum risk of $425 per contact (Stop loss at $200).
Options trades like the one above and the kind I specialize in are a great way to boost the returns in your brokerage account when you don’t want to tie up a lot of cash and want to minimize downside risk.
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