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How the bulls are seeking a bounce in precious metals
Precious metals have fallen sharply in the last four months, but now the bulls are targeting companies like Fortuna Silver Mines and Eldorado Gold.
OptionMonster's tracking programs detected the purchase of approximately 9,500 January 5 calls in FSM for $0.80. A matching number of December 5 calls were sold at the same time for $0.50 against open interest, which suggests an existing long position was rolled one month into the future.
Calls provide leveraged exposure to a rally because they fix the price where a stock can be owned. Friday's transaction occurred hours before expiration, so the trader probably wanted to avoid being assigned shares in the Vancouver-based firm. (See our Learning Center .)
FSM ended the session down 0.57 percent to $5.26, and has lost 43 percent of its value since mid-August. The investor's use of in-the-money contracts will allow him or her to control only upside with limited downside risk. Such approaches are often known as "stock replacement."
EGO's activity was also in the money: About 7,700 January 2.50 calls were bought or $0.40 and matching number of December 2.50s were sold for $0.30. Once again, it appears they rolled a long position. This time they paid a net $0.10 for an extra month of upside in the name. EGO rose 1.10 percent to $2.75.
New Gold was slightly different because traders targeted an expiration more than a year from now: Some 3,850 January 2018 4.50 calls were sold, mostly for $0.55, and 2,355 January 3.50 calls were bought for $0.90. While the size decreased they kept roughly the same net delta . NGD slid 2.08 percent to $3.30.
First Majestic Silver's transaction involved put selling -- a strategy similar to call buying because it has a positive delta and profits from a bounce. About 4,000 January 9 puts were sold for $1.75 and 4,000 December 11 puts were bought for $3.60, resulting in a net cost of $1.85. Volume was below open interest in the 11s, which indicates the investor didn't want to be assigned shares at the close. Rolling to the 9s gave him or her an additional month for the stock to rebound. AG, down more than 40 percent from its August peak before the session began, fell another 1.77 percent to $7.22 in the regular session.
There were similar trades on Thursday as well. Market Vectors Gold Miners Fund (:GDX), saw 25,000 January 19 calls bought for $1.25. Tahoe Resources (:TAHO) had bullish paper in the January 10 and January 12.50 calls. Newmont Mining (NEM) also had a stock replacement trade, with an even 2,000 March 25 calls purchased for $6.40.
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