Loading ...Out-of-the-money put option prices have skyrocketed on this commodity play
But whether bitcoin is solely to blame for gold’s recent drop — and one could argue that the stronger dollar and tax reform optimism have also played a part — is neither here nor there. What fascinates me is the recent spike in the cost of “crash protection” on the VanEck Vectors Gold Miners ETF (GDX), which invests in the shares of gold miners.
Specifically, the 10-day moving average of GDX’s put/call skew on 5% out-of-the-money (OOTM) options – which compares implied volatility (IV) readings for OOTM puts against OOTM calls — has skyrocketed by more than 20% over the past 20 sessions, and stands at its highest point since December 2014. This indicates traders are bidding up the odds of an extended decline in GDX shares, which fell more than 8% from their Nov. 28 intraday high of $23.17 to their Dec. 12 intraday low of $21.27 – marking territory not charted since July for the fund.
Since 2006, there have been just eight surges of that magnitude in this barometer, including the one that flashed just last week. Three of the signals sounded before the March 2009 bottom, and the other four prior to last week’s occurred between September 2013 and November 2014. While I’d like to offer actionable insight into how GDX might perform after this most recent surge in OOTM put demand, the historical price action after such signals is mixed, not to mention very heavily skewed by the November 2008 signal, after which GDX skyrocketed more than 79% in six months, as the throes of the financial crisis sparked a run on “safe haven,” tangible assets like gold.
Perhaps the most “concrete” conclusion to be drawn from the data: GDX tends to be more volatile than usual in the intermediate term, following quick-and-dirty spikes in its OOTM put/call skew, as measured by a bigger-than-usual standard deviation of returns following these signals.