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Have the Tides Turned for the Troubled Goldcorp?

Patrick Ceresna
January 23, 2018
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4 minutes read
Have the Tides Turned for the Troubled Goldcorp?

The last few years have been a struggle for Goldcorp investors.  The company has been overshadowed by declines in earnings, falling gold production and increased costs.  Many investors have abandoned the stock for other gold miners with more momentum.  Yet there are a number of green shoots that suggest the management is turning things around.  There has been considerable cost cutting to try to stabilize earnings while the outlook for production is increasing toward 3 million ounces by 2020.

There comes a transitory moment in a stock where the disappointments of the present are outweighed by the opportunities of the future. That moment usually comes unnoticed by many as most have left the stock for dead and simply are positioned elsewhere.

Will investors be rewarded for taking a risk here or will the stock still be overshadowed by its disappointing 2017 performance? What are the risks? How does one position themselves into the stock?

Looking at the price action of Goldcorp over the last month, one can see the stock has bullishly broken out of a high-volume consolidation zone between the $15.75-$17.25 zone, hitting a swing high of $19.32 before its current consolidation.  From this price action alone, traders will be looking to see if the pullbacks are being bought on dip.

 

Short Term Calls as a Stock Entry Strategy

This makes Goldcorp an interesting trade opportunity if one can manage the risk.  So how can we build an options strategy around the stock?  This is where I like to consider short-term call options as a way to enter a new stock position.   Those not familiar with options, the call secures the right to buy a security, at a specific price, over a specific period of time.

Why use the option instead of buying the stock?

Like a mulligan in golf, it offers me an opportunity to lock in a potential purchase price, but… if the market proves that I am too early and the stock declines, I can walk away from the call option for a small loss and have a second try on a new entry from a potentially better level.

 

Let’s go through an example:

  • TSX:G is trading at $17.80 on January 22, 2018
  • The February 9th, 2018 $17.50 call option (weekly) is $0.65 (18 days till expiration)
  • We buy 1 call option for every 100 shares of stock we are looking to secure

So let’s build 3 scenarios at the February 9th expiration.

Scenario 1: Goldcorp continues to rally and the stock advances to $20.00 a share.

Under that scenario, I would exercise my right to buy the shares at $17.50 and would have an adjusted cost base break even of $18.15 ($17.50=$0.65).

Scenario 2: Goldcorp remains rangebound and is trading near its original starting price of $17.80 a share.

Under that scenario, I would exercise my right to buy the shares at $17.50 and would have an adjusted cost base break even of $18.15, sitting on a small unrealized loss.

Scenario 3: Goldcorp deeply retraces back towards its 2017 lows under $16.00 a share.

Under that scenario, the $17.50 call option expires at a $0.65 loss and I would be looking for a better entry price off lower levels.

To summarize, by using the call option, I have secured the right to buy the stock at $17.50, and over the next 18 days I have the right to decide if I wanted to exercise that right.  If the situation is not bullishly developing, I will walk away from the trade at a maximum loss of $0.65 a share.  This is just one of the many ways one can use options to manage and define risk.

Patrick Ceresna
Patrick Ceresna http://www.bigpicturetrading.com

Derivatives Market Specialist

Big Picture Trading Inc.

Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his roll at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios. Patrick is also co-host to the MacroVoices weekly podcasts. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes with the attempt to understand when those trends are beginning and understanding where they likely to go. With his expertise in options trading, he seeks to create opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and teaches Big Picture Trading's Technical, Options and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.

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