The miner massacre is giving options investors a gift wrapped in gold. Newmont was left in the lurch, down nearly 20%, due to a “disappointing” outlook that the market frankly misread. Newmont fell to the 150-day moving average supported by our favorite chartist, Carter Braxton Wirth, but rebounded from there. At the same time, Newmont’s option premiums are rising. The two-month implied volatility (the way options traders think about option prices) is in the 91st percentile. This provides an opportunity to profit if Newmont rebounds from the trend line towards its previous high, and is less risky than buying the stock if it falls. Trade: Bullish Risk Reversal You want to perform a bullish risk reversal (selling a put to fund a call spread) to capture a move back toward a previous high. Selling a July $90 put for $5.10 Buying a July $110 call will pay you $11.50. Selling the July $130 Call @ $4.25 Net Cost: ~$2.15, or just 2% of the current stock price By selling the put, I am effectively claiming to be a happy buyer of the world’s leading gold producer at a discount to book value, and using that “fear premium” to pay for the vertical call spread. This gave it a nice runway to $130, just shy of its previous high of $134.88. If volatility decreases, or over time, the decay of the short 130 call and short 90 put will offset the decay of the 110 call that I own. Notice in the chart below that the trade has a profit of over $110, even though the profit limit is $130. This is fine because the stock is close to previous highs where it is likely to encounter resistance. If the stock price falls, you risk being forced to buy the stock at $90 per share. However, this is within acceptable limits. 1) That’s a 15% discount off the current price, even after the ~$2 premium I paid, and 2) It’s not that far off the lowest price of the last 6 months. The Bull Case: Owning Top-Class Assets at Mid-Shelf Prices There’s a reason Newmont is the only gold miner in the S&P 500. It’s an integration with Newcrest. Newmont acquired the Melbourne, Australia-based mining company about two years ago. Perhaps the capital expenditure guidance is one reason investors must accept that the “synergies” of this deal may take until 2027 to materialize. However, Newmont has removed non-core assets and is concentrating on “Tier 1” mines that produce 500,000 ounces or more at the lowest overall sustainment costs. As we monetize our smaller mines, our balance sheets become leaner and our dividends more secure. Base Case: Mean Reversion Despite the strength of the dollar, gold is performing well. Even if gold is flat, NEM is basically oversold. A simple average reversion to the historical cash flow multiple of 15x would increase the stock price by 30%. Bear case: Margin squeeze The risk is persistent and persistent inflation. While the AISC “floor” will rise if labor and diesel costs continue to rise in Nevada and Australia, it is worth noting that inflation/low fiat land prices represent a core theme for holding precious metals in the first place, even if it creates operational problems for miners. So two of the three scenarios are good for gold and gold miners, and one is a “not-so-bad” scenario. Disclosure: None. All opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, its parent or affiliates, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The Content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
