We bought long-dated deep in the money call options in the VanEck Vectors Junior Gold Miners ETF (GDXJ) in late May in the expectation of a sustained move higher in this sector. Since we penned that piece, the ETF has tacked on just under 3%. At present as I write, shares of GDXJ are trading at approximately $47.70 per share.
Although these call options have 571 days to go to expiration, we recognise we need to keep tabs on this position far more closely than regular stock or ETF positions. The reason being is the time element which is associated with buying options. Although we went out as far as we could with this particular option, the contract still has a finite amount of time attached to it (around 2.5 years).
Some may consider the limited time in the option a disadvantage especially if the position were to turn against us. In saying this, (because our option at the time of purchase had a delta of more than 90%), the break-even of the options trade (when we add the strike price to the premium we paid) versus buying shares of the ETF are indeed very similar. This is something that detractors of the DITM strategy (Deep-In-The-Money-Options) many times do not consider. We essentially paid just over $2400 to buy 100 shares of GDXJ at $24 throughout the lifetime of the contract which expires in January 2022.
Considering the fact that our portfolio is already heavily invested in the precious metals space, our deep in the money call option in GDXJ gives us extra leverage in this space plus other significant advantages.
- Although under all intensive purposes we are controlling 100 shares of GDXJ, we paid about 50% less versus buying the shares outright.
- This means we have less capital at risk.
- We can use this saved capital to invest in other stocks or volatility plays.
Obviously, we bought the call option because we expected a significant move in the sector to get underway. As we can see from the weekly chart of GDXJ below, shares have now started week 16 of their broader intermediate cycle which began last March. We still need to break out convincingly above week 10 to confirm that this intermediate cycle is continuing to make higher highs. Until we do this, we remain aware that there still remains the risk that price topped on week 10. Soon enough we will know whether the week 10 highs are the highs of this intermediate cycle. If they turn out to be, we will be selling our call option and most likely be re-entering positions at the next intermediate cycle low.
As we noted in a previous article, the juniors have been underperforming the mainstream miners for quite some time now. As we can see on the long term chart below, shares of GDXJ at present are trying to breakthrough their 2016 highs. Once this happens (we still expect this to happen in this present intermediate cycle), we should see an explosive move in the junior mining sector. Remember, the gold mining sector along with precious metals bottomed in late 2015 when they printed their 8-year cycle lows. Gold’s multi-year cycle is 8 years which means we are 5.5 years into this present 8-year cycle. Our expectation is for gold and the mining sector is to give some type of blow-off top over the next 12 to 18 months before rolling over into their next 8-year cycle low which is due in late 2023/early 2024.
Therefore, to sum up, we are ultra-conscious where we are cycle-wise in the junior gold mining sector. The reason being is that we are presently long a 2022 call option which is deep in the money. Although we remain confident that the present intermediate cycle as well as the current 8-year cycle in this asset class are going higher, we do not rule out that the present intermediate cycle for example (week 16) has already topped. If we get confirmation of this in the near term, we will be quick to exit our deep in the money GDXJ call option. Let’s see what the rest of the trading week brings.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Disclosure: I am/we are long GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.