GDX Setup

[Billy]

As an anticipated setup in my last post, GDX is testing the 61.8% fib retracement (26.73) from the August low and the 50 dma (26.81). The 50 dma is also exactly coinciding with daily S3, adding strength to this intraday support area.
We also can observe a potential second right shoulder of a complex inverse head & shoulder pattern forming. And there is another good potential support trendline around 26 to break any violent downside move from here. All short term momentum indicators are oversold and showing the first signs of positive divergence.
The GDX RT MF is trending up and trying to reverse since touching the 61.8% fib low of the day.
I am buying some calls here as the starter for building a new long position with a stop below the uptrend trendline.
Billy

19857
19855
19856

[ernsttanaka]

Billy,

In reaction to your suggestion to buy some calls on GDX.

Currently the implied volatility for GDX is in its 78 percentile. This means that when your directional observation is correct the IV will come down. The premium of the calls you bought will be reduced by time decay and the reduction of IV.
For example if you bought the GDX Oct 26.50 call for $1.55. Will be in 2 wks from now be priced $2.45 if GDX moves $2 up and the IV will come down 5 points. In the end you "only" made 90ct on a 1.55 investment. Not bad but GDX needs to move otherwise your calls will be a losers.

I think it is better to;
a. sell some GDX OCT puts. For instance the 25 strike for 84ct. After the same move those will be priced 27ct. Leaving you with a profit of 57ct. But now you have time and IV reduction working for you. PLUS if GDX doesn't move $2 up, the trade is still profitable come OCT expiration.

or

b. Buy the ATM call spread for. Buy the 26 calls and sell the 27 calls for total 50ct. Again you need no price move to make some profit and full profit will come when at expiry GDX trades above 27. Also in this trade you have time and IV reduction working for you.

if you really want to buy calls (not my play here) I would finance it by selling some puts.

My personal play in GDX is selling puts and calls. I would sell the OCT 25 put and the OCT 29 calls for $1.47. Giving me a profitable trade between 23.53 and 30.47. Plus lots of room and time to play defense if that range gets breached. Currently I have a similar play for Sept, and I and waiting to close that before I reload for OCT.

Hope that one day we will have you back. We all miss your (daily) insights.

Ernst

[Billy]

Ernst,

Thank you for these very inspiring suggestions and for improving our options trading skills.

I will certainly consider your strategies for my further entries into this long position. I bought 25% of my maximum exposure yesterday (on weakness) and intend to add incrementally preferably on strength triggers from my initial entry. The first trigger for a second quarter of exposure would be a stable recovery above 50% of yesterday’s range (gap included) i.e.above 27.06. My new stop for the whole position would be my initial entry level which was 26.76 on GDX. So, barring time decay and IV changes with the options, a new pullback to the first buy level would allow me to exit globally around breakeven. But I expect the rising 50 dma to hold in such a case and good probabilities for not being stopped out.

If GDX keeps falling from here, I would only enter the remaining 75% of exposure near the rising uptrend line, based on a positive RT GDX MF reaction intraday (and if I’m not scared to death! ) with a very strict stop just below the trendline. If it happens without a gap, total damage should be minimal.

For now, GDX is back-testing the old declining trendline from the June and July tops, and flirting with the rising 50 dma and lower Bollinger band. It is also at the perfect level for a second right shoulder formation of a complex inverse H&S. On the chart below, it is obvious that the new rising support line needs to hold to keep the validity of this base intact and it might need to be touched first before GDX starts an upside reversal.

My health state, and especially the side effects of my medication, still prevent me from consistent daily forum activity. This may hopefully improve over time and thank you for your support!
Billy

19870

[Billy]

GDX didn’t quite touch the uptrend support line and is probably doomed to test it later today. Let’s wait for large players to show the way by then. So far, they didn’t participate at all in the first bounce of the day which is why I think there may be another selling wave soon to test the line and maybe undercut it. It is very tough to go with a full exposure now, especially with the risk of another down gap tomorrow. This is a game that I will play very lightly as long as the GDX MF has not traded oversold below -1.3% as Pascal explained in his morning’s comment.
There is also a smelly feeling of another massive manipulation in the air to depress the precious metals sector no matter what...
Billy

19889
19890
19891

[Billy]

http://www.zerohedge.com/news/2013-09-12/vicious-gold-slamdown-breaks-gold-market-20-seconds?

[Billy]

Ernst,
Any thought for the imbalance at the 25.50 strike october calls?
Billy
19892

[ernsttanaka]

Ernst,
Any thought for the imbalance at the 25.50 strike october calls?
Billy
19892
I have never heard of a sound method to interpret Open Interest or Option Volume. For instance the 1000 you see at the ask. Are those to cover or are they open new trade. Does the trader have 200.000 shares GDX short and is he just limiting his risk on half of his position?

The only thing I use volume for is to asses before I enter the if the options are traded enough to get a fair market, and to get a small bid/ask spread.
For instance if you see at least 1M shares traded, and a couple of k's options traded and a bid/ask spread less than 5ct. Then at least you know prices are fair and widely accepted. Then you can enter a trade and don't leave too much on the table in terms of slippage.

Ernst

[Chern]

There is no guaranteed answer (is there ever in the market?), but it does have some utility. Whatever their reason, there are clearly buyers at that area. It can be exploited for short term trading. Note that this morning despite the dump in gold and initial big dump in gdx it was bought immediately and shot up to 25.69. I have occasionally put in lotto orders to try to catch the morning juggling as the stops are hit, and it was very rewarding; the risk is very small as you are usually getting filled at 3-5 cents, and will get 5-10 times your money. I emphasize that you will get very few contracts, the algos do this extremely rapidly and you should place the trades the day before as GTC. I wish there was a way to automate and scan for these anomalies as it can be so much fun to make that money, and it is usually made very quickly. Also you need a low commission broker, as the commissions can actually double your option cost.

[Billy]

There is no guaranteed answer (is there ever in the market?), but it does have some utility. Whatever their reason, there are clearly buyers at that area. It can be exploited for short term trading. Note that this morning despite the dump in gold and initial big dump in gdx it was bought immediately and shot up to 25.69. I have occasionally put in lotto orders to try to catch the morning juggling as the stops are hit, and it was very rewarding; the risk is very small as you are usually getting filled at 3-5 cents, and will get 5-10 times your money. I emphasize that you will get very few contracts, the algos do this extremely rapidly and you should place the trades the day before as GTC. I wish there was a way to automate and scan for these anomalies as it can be so much fun to make that money, and it is usually made very quickly. Also you need a low commission broker, as the commissions can actually double your option cost.

Ernst, thank you for your reply.

Chern,
Such a big quantity imbalance in favor of the ask side for call options represents a bearish bet on GDX by some large players, or at least the bearish side of a more complex option strategy. Otherwise, they would be on the bid size. So I have difficulty understanding why you deem that “there are clearly buyers at that area”.
Lotto options are similar to pure gambling and have nothing in common with professional trading. But I guess they can be fun indeed!
Billy