Written by Norm Winer. Follow me on Twitter.
We had noticed in the past two months that the ratio of the price of GLD (Gold ETF) to the price of GDX (Gold Miners ETF) had steadily declined. Perhaps it was an indication that the market was not factoring a potential gold price correction into the price of GDX. Overall, the GLD to GDX price ratio has been very volatile the past two and a half years. We believed we could capitalize on this volatility.
With these trends in mind, on September 21, we bought many of the following spreads: 4 * GLD - 9 * GDX at 9:31 AM for a $3.37 debit. As gold prices declined, the spread quickly widened. We sold the spread about seven minutes later at $5.59, for a $2.22 gain per one hundred spreads. The spread eventually widened much more before the Fed meeting as gold continued to sell off, but it narrowed again to opening levels when gold rallied after the Fed meeting.
Since the 21st the volatility of this spread has increased and we have traded in and out of it three times for a profit. We are trading this product from a volatility and correlation framework.