Golden Again?

I talked about gold stocks in the in the June 19th blog and looked at some aggressive trades using July options. The July options expired over the week end and the results are in.

The Goldcorp July 46 calls that were trading at $1.25 at the time of the June blog, went off the board on Friday at $5.60, up 347%. The Barrick Gold July 44 calls at 65 cents closed on Friday at $2.11, up 225%. We also looked at the Kinross Gold July 15 calls at 45 cents, that subsequently went off the board at $1.56, up 247% and the iShares S&P/TSX Global Gold Index Fund July 22 calls at 65 cents, which closed on Friday at $2.50, up 286%.

The reason for revisiting the numbers is that I think there may be more to come. Fears that problems in Greece will infect some of the larger names in the Eurozone (read Italy) brought about an exodus from risk into safer haven-assets. Those included mostly all things with a US dollar sign on them, primarily US Treasurys and gold.

Surpassing US$1,588 per ounce last week, gold seems ready to test the US$1,600 level. Along the way cementing its desirability as a store of value, a currency hedge, and a speculative play, to say nothing of its continuing value as both an industrial and consumer metal. The bottom line is that as long as the eurozone remains in the red zone – and that looks to be the case for the foreseeable future – gold is likely to find still more upside momentum.

And that takes full circle back to gold mining companies, which despite the recent numbers, have still lagged the performance of gold itself. That gold miners have not correlated perfectly with the rising price of gold owes to the many variables associated with company shares that do not necessarily affect the underlying commodity. Mining companies must deal with the day to day job of finding new supplies which can be an expensive and time-consuming business.

What we do know is that major gold miners are minting money, and many have huge cash hoards, ready for acquisition and development. For the more aggressive trader, the idea is that at some point, the sails of gold mining companies will catch the same gusts that are driving gold prices. And the timing may never be better as miners begin reporting quarterly results. Option traders willing to bet on much-better-than-consensus estimates (e.g., on Goldcorp before July 27) could turn some decent profits over the short term.

There are a couple of ways to play this; the first being a sector bet, though the purchase of call options on the iShares S&P/TSX Global Gold Index Fund (TSX: XGD, recent price $24.50). The second; through an option strategy on individual gold miners like Goldcorp Inc. (TSX: G, $51.60).

With XGD, look at buying the September 25 calls at 75 cents (implied volatility 24%). If gold stocks rally because of better than expected earnings, it will be reflected in the price of XGD.

If you prefer trading individual miners, the Goldcorp August 52 calls at $1.75 (implied volatility 30.5%) look interesting. Another less aggressive approach is to write (i.e. sell) a cash secured put on Goldcorp. In this case, you would sell the Goldcorp October 50 puts at $2.45.

With the cash secured put, you are assuming an obligation to buy shares of Goldcorp at $50 per share until the October expiration. If the stock rises, the value of the put will decline. At which point you could re-purchase the puts at a profit. You could also simply hold the position to expiry. If Goldcorp is above $50 per share at the October expiration, the puts will expire worthless and you will retain the entire premium.

The risk is that Goldcorp declines. The “cash secured” nature of the position means that you have set aside sufficient cash ($5,000 for each option sold) should the puts expire in-the-money.

In other words, if Goldcorp is below $50 per share at the October expiration, you will required to buy the shares. Your net cost will be $50 per share less the $2.45 premium received, which equals an out-of-pocket cost of $47.55. If you are entering this position, you should be comfortable owning Goldcorp at the net out of pocket cost.