February Could Translate Into Gains for Precious Metals

Gold prices have been ticking higher in 2017, as several White House policy decisions stoke anxiety and recent comments from President Donald Trump put pressure on the U.S. dollar. As such, many precious metal stocks and exchange-traded funds (ETFs)  have widened their healthy 12-month leads. In fact, our internal Sector Scorecard shows the average 52-week return among the 25 components we track under the "precious metals" umbrella sits at nearly 121%. History suggests this month could translate into even more gains for the sector -- specifically, the VanEck Vectors Gold Miners ETF (GDX) and the iShares Silver Trust (SLV). And while GDX and SLV could be headed for a positive February, options traders have been put-heavy toward both ETFs of late.

Beginning with GDX, the ETF is up nearly 67% year-over-year, enjoying a lift from its 20-day moving average since late December. The shares could also find support in the $23.50 area, which marks a 38.2% Fibonacci retracement of GDX's late-2016 plunge. The ETF is down 0.4% at $23.83 today, as traders parse a hefty round of economic data and the latest policy announcement from the Fed. But GDX could soon be headed higher. February has historically been the ETF's strongest month of the year, with the shares averaging a return of 5.3% since GDX's May 2006 inception, according to data from Schaeffer's Quantitative Analyst Chris Prybal.

Despite long-term technical strength, speculators have taken a bearish approach toward GDX. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, traders have purchased 1.47 puts for each call over the past two weeks. This ratio rests higher than 86% of all readings from the last 12 months, meaning puts have been bought to open at a faster-than-usual pace. Specifically, the weekly 2/3 22-strike and weekly 2/10 22.50-strike puts have seen the largest increases in open interest in the past 10 sessions, with the major exchanges confirming buy-to-open action at both strikes.

It's also an attractive time to purchase short-term options on GDX, considering unusually low volatility expectations are being priced in. The ETF's Schaeffer's Volatility Index (SVI) of 40% ranks in the low 13th annual percentile. Plus, the Market Vectors Gold Miners ETF has a Schaeffer's Volatility Scorecard (SVS) of 96, indicating the options market has underpriced GDX's ability to make outsized moves over the last 12 months.

Meanwhile, SLV is up 22.5% year-over-year to trade at $16.69. The ETF recently broke out above resistance in the $16.30 region, but is now bumping up against a 38.2% Fibonacci retracement of its own late-2016 decline. Still, it looks as though the shares may have found a fresh foothold above the 100-day moving average. Historically speaking, February has been SLV's second-best month, falling just behind January, with the ETF seeing an average gain of 5.1% since its inception in April 2006.

Put buying on SLV has been accelerated in recent months, though calls still lead on an absolute basis. The ETF's 50-day put/call volume ratio of 0.27 across the ISE, CBOE, and PHLX resides in the 74th percentile of its annual range. And over the last two weeks, the $16 level has been in focus, with the February, March, and weekly 2/3 16-strike puts seeing the highest increases in open interest among options that have not yet expired. While buy-to-open activity has been detected at the weekly strike, the major exchanges point to significant sell-to-open action at the monthly strikes. Simply stated, put sellers are betting on the $16 level to serve as a short-term floor for SLV.

That said, it appears to be a much better time to buy premium on the iShares Silver Trust (SLV) than to sell it. The ETF's SVI of 23 sits just 12 percentage points from an annual low, while its SVS is docked at 91. In any case, SLV options traders seem to be sitting on the sidelines today, with volume running well below the expected intraday rate.