Profit From The Thrashing In The Gold Stocks (GDXJ)

call spreadsGold stocks were slammed on Monday — profit if GDX remains under pressure

Tremors were felt in gold mining stocks Monday. What began as a run-of-the-mill bout of profit taking soon morphed into a torrential downpour of sell orders. By day’s end, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) had fallen 5.3%. And if you think that’s bad, take a look at the damage inflicted in the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). Its losses doubled those of GDX. The junior gold miners fund limped into the close shedding almost 10% of its value.

And you can imagine how dreadful the performance of the Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA:NUGT) and Direxion Daily Jr. Gold Miners Bull 3X ETF (NYSEARCA:JNUG) were.

Participation ran hot in GDX and GDXJ. Unless my eyes deceive me, Monday’s 61 million shares traded was the highest GDXJ has ever seen. Chart watchers view high volume as an indication of institutional money flow into and out of the market. High-volume up days suggest the big boys were accumulating shares, while high-volume down days suggest they were distributing (or selling) shares.

Market Vectors Junior Gold Miners ETF

There are two ways to interpret Monday’s downdraft. Optimists may view the monster volume as capitulation. The participation was so high, they reason, that any and all who wanted to sell gold stocks have sold. Thus, a rebound is in the cards. I’m skeptical of this narrative.

Capitulation arrives near the end of a prolonged sell-off, not on the first significant down day after a stock has risen to a new 3-month high.

If institutions have turned on gold miners, then I suspect the industry will remain heavy. While GDX and GDXJ won’t necessarily nosedive into the abyss from here, it’s a decent bet that at least a short-term top may be in place.

Mine for Money with GDXJ Call Spreads

Because of its more volatile temperament, options on GDXJ tend to run more expensive than those on GDX. And that makes short GDXJ trades more attractive. If you think the sector remains bearish for the weeks ahead, consider selling the GDXJ April $40/$44 call spread for 80 cents or better.

The bear call spread will deliver a max reward of 80 cents if the stock sits below $40 at expiration.

The max risk is limited to the distance between strikes minus the initial credit, or $3.20, and will be lost if the fund rises above $44 by expiration.


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The author of this article is Tyler Craig. At the time of this writing, Tyler had no positions in any of the aforementioned securities.

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Category: The Spread Trader

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