BY: HANS ALBRECHT, CIM®, FCSI, VICE PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
Having traded options for about 20 years, I’ve observed a few patterns about investor behaviour when it comes to volatility. Normally, as equities rise, option pricing tends to relax and compress. Intuitively, this makes sense: when prices are falling and investors get worried, they will scramble to buy protection, thereby, pushing up relative pricing levels for insurance in market selloffs. As stock prices recover, option pricing will relax to reflect that dissipation of fear. Hence, the VIX being nicknamed the ‘fear gauge’ — it tends to rise into market selloffs, and fall as markets recover.
Gold miners, however, are the outlier in this respect. As the price of gold rises and mining stocks follow, implied volatility tends to stay firm or even rise. This could be due to the fact that gold is seen as a safe haven and benefits from other assets falling. As gold rises, so do option prices and upside call skew, meaning the prices for out-of-the-money calls are actually pushed higher by bullish participants. At the moment, upside call skew for the VanEck Vectors Gold Miners ETF (“GDX”) is at its highest level in almost 10 months.
For covered call sellers, this is particularly powerful, since usually one must sell relatively cheaper calls into rising asset prices. Not so with gold miners; we are able to execute a covered call strategy knowing that we are getting exceptionally good call pricing with which to hedge our mining names and generate income. It doesn’t get much better than that. Gold miners are performing superbly well this year, especially with weak and uncertain global economic growth, excessive negative rate policies and Brexit. In these turbulent times, an allocation to precious metals may make sense, with favourable option pricing in the sector, covered calls on gold miners may make even more sense.
The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.