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Henry Schwartz Analysis: Mining the Gold Names

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Gold lost another $50 yesterday, dropping to $1,225/troy oz. and setting fresh four-year lows. The yellow metal has now plummeted over $500 an ounce since October and the decline is taking a toll on shares of many gold mining names. In the options market, there's been a noticeable uptick in volume and implied volatility in a number of specific stocks as well. Several names fell to multi-year lows and saw brisk options action Wednesday.

The largest blocks of options in the gold mining sector yesterday were part of a spread in Kinross Gold Corporation (KGC), as an investor sold the January 5-6 call spreads on KGC at $0.21 17,300x. Today's open interest numbers indicate that a position was being rolled down in strikes. The stock is down more than 30% in the past few weeks, to $4.56, and the investor was closing out a positoin in the January 6's while selling-to-open a new position in the January 5's. It might be an adjustment to a covered call or buy-write on KGC, and seems to be expressing the view that the stock will see limited upside through the rest of this year.

Newmont Mining Corporation (NEM) was down nearly 6% to $27.22 yesterday, and January 19 puts on the stock were being opened. Goldcorp, Inc. (GG), which fell 4.6% to $22.35, saw increasing interest in its January 15 puts. Gold Fields Limited (GFI) dropped 7.5% to $4.70. One payer was selling the October 6-8 call spread 8,000x for $0.07 a contract, and closing a short October 8 call for $0.06 while opening the October 6 calls. Lastly, Barrick Gold Corporation (ABX), the world's largest miner, dropped 8.3% to $14.78 and opening activity was seen in October 13 puts on the stock. Implied volatility in ABX is now 58% - the upper end (98th percentile) of the 52-week range.

Suffice to say, there's been a lot of carnage in the gold mining space and all of the names mentioned here are falling to multi-year lows. The options order flow remains bearish and, yesterday for example, call sellers and put buyers seemed to dominate the activity. Implied volatiity is very elevated. Maybe there is too much pessimism, but at the same time, nobody wants to "catch the falling knife". Still, if you believe the sell-off is overdone, now might be an opportunity to sift through the sector and pick up some stocks that have strong fundamentals - while taking advantage of the high implied volatiilty to write calls. In other words, covered calls or buy-write strategies (buy stock, sell calls) might be viable ideas for the battered gold mining names today.

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