Do you think this gold miner back in the day knew about GDX options?
In this installment in our most liquid options series, we will speak about GDX options and will go through everything about them to see if they are right for everyone to trade.
What is GDX?
GDX is the Vaneck Vectors Gold Miners ETF. Really with these names?
Before we really dig into anything, we need to figure out what GDX is to start. For starters, is has the word “gold” in it, so maybe it is very correlated to gold and precious metals. Let’s check and see its correlation to gold, silver, and the dollar.
GDX is highly correlated with gold (GLD) and silver (SLV) at the tune of 88 and 91 respectively while being somewhat negatively correlated to the US Dollar.
According to Vaneck, the top 10 holdings in GDX are:
While GDX is highly correlated to gold and silver is it not 100%. Here, we see there are some companies that make up GDX that are not US based. Some companies could also cut costs while the price of gold remains the same which would boost the price of their respective stock. These and more could be reasons why there is not a 100% correlated but they are close enough!
We take GDX for itself and have it on our watch list all day every day.
Why is GDX on our Watch List?
One of the reasons GDX is on our watch list is because of its price movement. We can see over the last year, GDX made for an excellent trading vehicle. It went up 50% and down 50% all in one year. This (amongst other reasons), makes GDX a traders dream. GDX’s daily expected move is double that of gold and triples that of silver, so if we are a trader (we are) and love price movement (we do) this is a no-brainer if we are interested in getting exposure to precious metals.
But what about liquidity? We make a really big stink that every single asset we trade must first and foremost be incredibly liquid. How does GDX stack up?
For starters, there are very few stocks in the world with this much volume as GDX is in the top 10 highest volume stocks. With the current price of $21.73, GDX traded a total notional value of $1,797,609,643.20 worth of stock. This is absolutely insane. But this is only one of the reasons it is on our list.
We are writing this post on the weekend but we can assure you all that during the trading day, the bid/ask spread on the stock is no more than 1 penny wide. Boom.
But we have left out the best part. We are options traders. And we absolutely LOVE GDX options.
We LOVE GDX Options
There is nothing bad anyone can say about GDX options. Let’s start with the basics.
A stock cannot be liquid without a ton of participations. We already mentioned that GDX’s stock traded over 80 million shares in a day, but we now know the option volume is equally impressive. 166,470 options contracts traded yesterday is $361,739,310 in notional value.
Now if those many contracts exchanged hands in GDX options and that much notional value was also exchanged, it must mean the options markets are very tight…right?
You bet! There are a few things to note here:
- The bid/ask spread is no more than $0.02 wide
- There are half dollar strikes
- The open interest and volume is outrageous
Look at that volume and open interest. At every at the money strike, we have hundreds to thousands of contracts traded and at every strike (not just at the money) there are thousands of open interest.
Markets that liquid and that tight allow us to make any type of trade we want at any price we want (midprice). GDX options are truly remarkable because of this as we are not limited to anything we would like to do. If we want to get long GDX through options, we can do whatever we want to do.
On top of this, with GDX being a low priced stock ($21.73) the margin requirements are very small. Because of this, we are not limited to spreads when trading GDX options.
Right now, if we were to sell the 21 April 2017 $21 put, in a typical margin account, the regulators would only require us to put up only $420 in margin requirement. This makes the barrier to entry for trading naked options in GDX very small for absolutely anyone.
Even in an account that does not have margin access, to sell that $21 put cash secured would only cost the trader $2,100.
Incredibly. But it gets better.
There are also weekly options expirations on top of the monthly’s.
GDX is the Best
We cannot say enough about GDX.
- Stock volume in the 10’s of millions
- Stock bid/ask spread $0.01 wide
- Double the price movement of gold
- Incredible options volume
- Options bid/ask spread $0.02 wide
- Low priced stock which makes any options strategy no barrier to entry
- Monthly and weekly option expirations
And again, we are options traders and GDX options are amongst the absolute best.
We can get in and out whenever we want, at any price we want, and do not have to have extreme margin requirements because of the low stock price.
If GDX is not on your watch list, stop whatever you are doing right now, and go add it to the very top of the list.