Options Update: Yamana Gold Inc. Attracts Heavy Put Volume Despite UBS Initiation

Gold futures have been on a tear recently, fueled by safe-haven buying amid the current economic crisis. In fact, the April gold futures contract hit a high of $948.20 an ounce in today’s trading, its highest level since late July 2008. Against this backdrop, shares of Yamana Gold Inc.
Quote |
Chart |
News |
have benefited mightily from the precious metal’s rally, with the shares gaining more than 176% since their late-October 2008 low near $3.31 per share.

In addition to the spiking price of gold futures, AUY received another shot in the arm today. Specifically, UBS initiated coverage on the shares with a “buy” rating and a $12.75 per share price target. This target represents a premium of 38.5% to the stock’s current trading range.

Options traders, however, are not convinced that AUY’s positive price action has any staying power. For instance, the International Securities Exchange and Chicago Board Options Exchange’s 10-day put/call ratio of 0.72 ranks above 88% of all those taken during the past year, underscoring a preference for bearish bets on AUY. This put-buying activity continued in today’s activity, as traders piled into April 8 puts on the security.

So far, more than 11,000 puts have changed hands across the board on AUY, outpacing the stock’s average daily put volume by more than 6 to 1 and and placing the security on our Intraday Volume Explosion List. Nearly all of this put activity traded at the ask price on the stock’s April 8 strike.

Yamana Gold put volume details

The Anatomy of a Yamana Gold Put Position

Digging into the activity, I noticed several large blocks of April 8 puts totaling 10,000 contracts crossing the tape at 11:00 a.m. Eastern time at the ask price of $0.70. Assuming that these contracts were all placed by the same trader, the total outlay for this position would be $700,000 — ($0.70 * 100)*10,000 = $700,000. For this trade to reach breakeven, AUY would need to plunge about 20% to $7.40 per share from the stock’s current trading range near $9.20 per share before the options expire on April 17. The maximum loss on this position is limited to the initial investment of $700,000.

By entering this trade, the investor is indicating that he expects AUY to fall sharply during the next couple of months. The stock, however, is showing no signs of giving up without a fight, with AUY up nearly 10% at last check. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Technically speaking, AUY has put the broader market’s performance to shame in recent weeks. In fact, during the past 60 trading days, the shares have outperformed the S&P 500 Index (SPX) by a whopping 103% on a relative-strength basis. During this time frame, AUY has enjoyed the support of its rising 10-day and 20-day moving averages. The shares have also bested former resistance at the 8 level – home to its early January peak.

There are dangers ahead for AUY, however, as the stock’s 10-month moving average has descended into the 10 region. Not only is the round-number 10 level a potentially formidable psychological trading barrier, but the security has not closed a month above its 10-month trendline since June 2008. The combination of this long-term moving average and round-number resistance at the 10 level could create a formidable hurdle for AUY in the weeks ahead.

Weekly chart of Yamana Gold since June 2008 with 10-week and 20-week moving averages

The Sentiment Drivers

Unfortunately for contrarian investors looking for a clean-cut bullish investment strategy, AUY’s sentiment backdrop offers little in the way of potential sideline money for the shares. While there is plenty of pessimism building in the options pits- as mentioned above – short sellers have largely ignored the equity. During the most recent reporting period, the number of AUY shares sold short dropped by 8.6% and now account for a measly 1.3% of the stock’s total float. With short sellers running out of positions to cover, AUY could lose an important source of sideline cash.

Elsewhere, Wall Street analysts are largely bullish toward AUY. Currently, 9 of the 13 analysts following the shares rate them a “buy” or better, with nary a “sell” rating to be found, according to Zacks. While the UBS initiation is proof that there is room for more bulls on the bandwagon, the likelihood of any brokerage firms following this lead is growing increasingly slim.

Sentiment indicators for Yamana Gold

The Verdict?

There are 2 important factors going for Yamana Gold shares at the moment: momentum and the safe-haven allure of gold. Should recent government actions bolster even a modicum of confidence on Wall Street, we could see the latter reason fade into the background. And if gold prices flatline or pull back, AUY could begin to lose its momentum on the technical charts. As such, traders should keep a close eye on overhead resistance at the 10 level. This region could be a make-or-break area for AUY in the coming weeks.

A bull? A bear? Conservative? Aggressive? No matter what kind of investor you are, option trading offers you tools to enhance and protect your portfolio. Learn how from Bernie Schaeffer, the highly respected equities and option market veteran. Bernie’s home study course will show you how to leverage relatively small amounts of capital into big profits — in just 10 days. Includes CD, DVD, and other extras. Click here to learn more.

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