Since highlighting Goldilock’s return two months back the dash from cash and into gold has continued unabated. But what’s really got gold bugs all jittery is the action in gold stocks. The Market Vectors Gold Miners ETF (GDX) has been booming. It’s one of the few ETFs actually boasting high volatility these days. With stock volatility in the basement it’s certainly refreshing to come across an underlying with pumped up premiums.

All of the above explains why GDX was a hot topic in my trading lab last night. The discussion was so fascinating I just had to share it with all my buddies. Yep, that means you.

For starters, the options are juiced so we were looking at some type of premium selling strategy (aka short volatility aka option selling strategy). Next step was to figure out if we’re bullish, bearish, or neutral at this juncture. Take a look at GDX and tell me what your directional bias would be.

Obviously the trend is up so we’re bullish, but it’s overbought. It just ran up like 20% in the past five days. Can’t chase here, son. Risk/reward is too skewed against us. Boo. Wouldn’t mind getting long on a dip though.

On the other hand, the contrarians in my lab, a shrewd bunch if there ever was one, threw out the idea of getting bearish on GDX if it gets any more overbought. Play for a retracement in other words. So there we sat, wanting to get long at lower prices and short at higher prices.

Pop Quiz! What pair of option strategies gets you shorter as the market rises and longer as the market falls…automatically?

Look no further than the short strangle and iron condor. You can thank the negative gamma for that. Let’s say we sold the May 27 call and the May 19.50 put for a net credit of 58 cents. Think of it this way:

One, the short May 27 call obligates us to sell 100 shares of GDX at $27. But since we received 58 cents our basis would actually be $27.58. That was something the contrarians in my group were quite interested in. After all, $27.58 is 20% higher than GDX’s current price. Even if it did rally to such heights over the next couple weeks it would be mega overbought and highly susceptible to a drop which would GASP! generate profits for our short stock position.

Two, the short May 19.50 put obligates us to buy 100 shares of GDX at $19.50. But, again, since we received 58 cents the cost basis would actually be $18.92. That’s an attractive 17% discount to GDX’s current price which had the gold bugs in my group salivating.

Well, hallelujah. We just stumbled upon a win-win, an offering from the gods pleasing bulls and bears alike.

Yet another way you could defend the short strangle play is to say you’re a seller of any further rally in GDX, but a buyer of any type of pullback. Which essentially means you think a couple weeks from now the ETF may be right back to $23. Such a forecast certainly supports the short strangle idea.

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