Large options traders decided today was a good day to place some outsized bets against the gold mining sector via the GDX exchange-traded fund. The September and October $23 strike put options were particularly active, seeing more than US$5 million in volume in those two strikes/expiries alone:


GDX October Call/Put Options ($22-$24 strikes)

October $22 and $23 strike GDX puts were particularly active with the $23 strike trading nearly 3x open interest. Three opening trades for more than $500,000 in options premium each accounted for more than 1/2 of the day's volume in the October $23 puts. 

Why the heavily bearish options activity in GDX today? 

In one sense it doesn't make much sense because the gold miners are entering the most bullish stretch of the year historically (in the last 20 years the HUI Gold Bugs Index has averaged a 7.4% gain during August/September). However, on the other hand these put purchases are well placed at key resistance levels ($22 and $23) and offer the put buyers relatively cheap insurance (if they are hedges against long stock positions) or a cheap speculation (cheap implied volatility) on a technical breakdown in the next couple of months:


GDX (Daily - 1 Year)

Multi-month descending triangle with weakening Relative Strength - three tests of ~$21 support since March, will the 4th test be the charm (breakdown)?


GDX (Daily - 3 Year)

The $22 level represents the 50% retracement of the entire 2016 rally (from the $12s to nearly $32/share in GDX) and important support/resistance. Realized volatility has been in a steady downtrend since last November; on a percentage basis (ATR/price) GDX is the least volatile it has been in its history. 

Should the GDX break the $21 support level over the coming weeks the breakdown from the multi-month descending triangle would target a move down to at least $18. At $18 on the GDX today's October $22 & $23 strike put volume would have an intrinsic value of more than US$17 million, netting today's put option buyers in those strikes/expiries a ~US$12 million gain. 

The flip side of today's heavy put option activity in GDX could come into play on a rally above $23; a breakout above $23 would trigger an upside breakout from the multi-month descending triangle which would target a move up to at least the February highs near $25.50. Put holders who would suddenly (in the event of a rally above $23) be showing considerable unrealized losses might also rush to bet on a directional move to the upside which could offer additional upside fuel. 

In summary, today's unusual put option activity in GDX might not necessarily be a bearish omen. However, it does support the case for volatility expansion in the gold mining sector over the coming weeks. 


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