[Options] Fading A Pullback in Metals

Sean McLaughlin
March 16, 2022

The move in metals, commodities, and materials was pretty rapid during the last couple of months. Given that, it's little surprise we've seen a pullback in a lot of these names over the past week or so.

One name that was recently on our Hall of Famers report rose rapidly with everyone else. And now it feels like it overshot a bit on it's pullback and it's offering a nice tactical opportunity to swoop in and steal some profits.

But before we get into the nuts and bolts of the trade, here's what the team had to say about Newmont Corp $NEM last week:

JC mentioned this one in a recent conference call as well. This was back in February, when the stock was flirting with breaking out from a massive basing pattern.

Just this week, we saw a decisive upside resolution as the stock ripped to new highs.

It appears buyers have had enough time to absorb all the overhead supply at this critical resistance zone.

As long as we’re above the 2011 highs, this is a valid breakout and should be followed by a strong up leg.

We want to be long above 72.50 with a target near 108 over the next 3-6 months.

So that sets the stage for what we want to do next.

Here's how the chart in $NEM stands today:

Now let's obverse that implied volatility is high in $NEM options right now:

So this rules out playing our bullish thesis with straight long options. That could be a winning strategy, but we'd be swimming upstream against an eventual volatility mean reversion. I'd rather play this with a higher probability bet involving selling options.

Here's the Play:

I like selling a $NEM May 70/65 Bull Put Spread for an approximately $1.80 credit. This means I'll be short the 70 puts and long an equal amount of 65 puts. This is a defined risk spread and the most I can lose is the distance between the strikes ($5.00) minus the credit received ($1.80), which equals $3.20.

Yes, we have the potential to lose more money than we can possibly make in this trade. But we have both higher probabilities of profit on our side, and a technical picture that offers us a bit of a unique edge to lean against. Feels like a fair trade.

Of course, the market often has other plans, and if that turns out to be the case, I'll be looking to close this spread down to eliminate the risk of any further losses if $NEM can't stay above the $68 level. If we see any close below $68, I'll exit the trade on the next trading day.

Meanwhile, I'll leave a resting order to exit this trade at a 90 cents debit. This would mean I've captured 50% of the original premium I collected, which is always my best practice when managing bull put spreads. I'm not being greedy here, just tactical.

If you have any questions on this trade, please send them here.

ASO subscribers -- last week’s live Jam Session here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

 

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