Options Update: Newmont Mining Put Traders Take Profits Following Plunge

All-that-glitters is no longer the safe-haven investment it used to be, as gold prices have plummeted nearly 20% since peaking near $936 an ounce on October 10. The plunge in the malleable metal has taken quite a toll on mining and metals companies, and Newmont Mining
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is no exception. With gold prices falling sharply again today, it appears that some options traders are taking advantage of NEM’s 10% plunge on the session.

Specifically, more than 11,800 puts have traded on the security so far today. This volume has placed NEM on our Intraday Volume Explosion List, as put activity outnumbers the stock’s daily average by a ratio of more than 5-to-1. However, it was the heavy attention to the equity’s January 2009 30 put that caught my eye this afternoon.

Newmont Mining option volume details

The Anatomy of a Newmont Mining Put Position

Diving into the options data, I noticed that nearly all of the NEM January 2009 30 put volume crossed the tape in 1 rather large block, trading at 10:15 a.m. Eastern time at the bid price. Combine this data with the fact that volume at this option remains well below open interest of 6,349 contracts, and NEM is likely being targeted by heavy sell-to-close call activity – otherwise known as profit taking. Running with the sell-to-close theme, it would appear that a trader sold 1,742 NEM January 2009 30 puts for the bid price of $6.11. The total credit for this position would be $1,064,362 — ($6.11 * 100)*1,742 = $1,064,362. Since we do not know the entry price for this trade, I have know way of calculating the percent return on the position.

However, given current market conditions and gold’s lackluster appeal as a hedge against the current global turmoil, I can’t help but wonder if this trader has jumped the gun on the exit. On that note, it is important to adhere to the stop-loss and profit target you should have laid out prior to entering the position. That said, let’s see if the stock’s technical or sentiment backdrops provide any insight into a potential extension of NEM’s decline.

Getting Technical

Looking at a monthly chart of NEM hints that now might not be the worst time to exit a short NEM position. While the stock has plunged more than 40% since the beginning of the year, the shares are now trading near long-term support in the 25-26 region. This area has provided support/resistance for NEM in the past, and could provide a short-term floor. Should this level fail, however, the next level of support doesn’t materialize until the security approaches the 24 level – hinting that NEM could shed another 7% if conditions remain constant.

Monthly chart of Newmont Mining since January 2000

The Sentiment Drivers

On the sentiment front, we find a mixed outlook. First, options traders are betting on a rebound for NEM, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.56 indicates that calls nearly double puts among near-term options. What’s more, this ratio ranks below 73% of all those taken during the past year, meaning that options traders have been more bullish toward NEM only 27% of the time in the prior 52 weeks. As contrarians know, optimism on a falling stock has negative implications for the shares.

Meanwhile, Zacks.com reports that 7 of the 12 analysts following NEM rate the shares a “hold.” The lack of “sell” ratings could be a sign that the shares are vulnerable to downgrades from the brokerage bunch. However, if the stock continues to trek lower, NEM could actually be targeted by upgrades on a valuation basis. Given the current state of the commodities market, though, such a development seems unlikely.

Sentiment indicators for Newmont Mining

The Verdict?

If you have reached your target gains on a position, it is almost never wrong to take some profit off the table. For NEM, closing out a position following a nearly 10% drop in the shares look like a good idea. That said, the potential for an unwinding of the lingering bullish sentiment in the options pits dangles like a carrot, hinting that the equity’s decline has further room to run. If you are looking for a bearish play on NEM, a December or January 2009 27.50 put might not be a bad position.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.