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NEM: Mining a Speculative Position

Newmont Mining (NEM) reports quarterly and fiscal year 2011 earnings next week. Consensus see $1.27 per share for the quarter and $4.62 per share for the year. The 2011 earnings is a 20% year-over-year improvement. The price of spot gold has been the cause for NEM's bottom line performance, yet the forward price earnings multiple of 11X would have one think that the stock and futures markets do not expect gold to hold their current levels. If those markets did think better of gold, NEM would most likely be trading at a much higher price than it is today.

For fiscal year 2012 cosensus expects NEM to earn $5.44 per share, a 17% improvement over that of the expected 2011 performance. NEM represents solid growth with progressive management at its helm, but lacks are believers. I have traded NEM when its P/E was 30X-50X, so currently at 11X forward and earnings growth at 17% assumed rate of growth for 2012, this attracts my attention.

NEM's management is some of the best in the business as it has grown the market cap valuation to over $30 billion. The stock hit its all-time high of $72.42 in early November of 2011, a wild ride of a year for many stocks as well as gold!

The most important thing when trading gold mining names is that first they are a stock, and second their eventual valuation will be based on the underlying commodity. Many stocks today are economically performing well, but to not get their total "due" in this current stock market environment. Thus the rule of don't fight the tape must be adhered to with NEM or any other stock for that matter!

Let's review the charts and fundamental case with Jill and Scott:

What does make options trader/speculative sense is to use an in-the-money calendar call spread for NEM where the nearer month is sold short and the outer month is the long side. The risk is 100% controlled, that risk being the premium paid for the spread. This allows for time and price movement for NEM, possibly timed well enough to catch a bull cycle by summer.

This trade is high in risk because premium is being paid to own the spread as well as the shorted side of the spread being already in-the-money! You must understand these risks. This trade is medium-to-high in reward potential because the hedge for the long side is the nearer-term expiring call sold short. That call could expire near, if not, totally worthless. Should that occur the long side of the spread will become a naked long call with all the benefits that such a position offers. That call could then be possibly in position for NEM to move into a bull cycle.

Trades: Sell to open 3 NEM March 57.5 calls at $3.00 points and buy to open 3 NEM June 57.5 calls for $4.80.

The total risk for the spread is the premium paid, or $1.80.

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