Butterflies take wing in Goldcorp, Newmont
Someone expects Goldcorp and Newmont Mining to rebound in the New Year.
optionMONSTER's Heat Seeker monitoring program detected bullish butterfly trades in the companies on Friday, using the January 2016 contracts. The strategy is specially designed to make the most of limited moves, with price targets of $30 on both.
GG hit first, with 5,000 of the 20 calls bought for $2.46. A block of 10,000 January 2016 30 calls were sold for $0.58 and 5,000 of the 40s were bought for $0.20. Volume was more than twice open interest at all three strikes.
The trade cost $1.50 and will earn a maximum profit of 567 percent from a move back to $30. Gains erode above that level and the entire strategy becomes worthless at $40 or higher.
It works because long calls lock in the price where a stock can be purchased and selling them forces investors to deliver shares. The butterfly makes money between $20 and $30, but then the larger short position starts losing money. It's canceled out by the long calls at $40. (See our Education section.)
NEM followed about five minutes later. This time, they paid $2.63 for 5,000 January 2016 20 calls and $0.16 for 5,000 of the 40s. The block of 10,000 contracts at 30 was sold for $0.52, resulting in an overall cost of $1.75 and maximum profit of 471 percent on a move to $30.
GG rose 3.85 percent to $18.35 and NEM rose 1.51 percent to $18.85. Both have lost more than half their value in the last three years amid a broad selloff in precious metals.
Total option volume was 5 times greater than average in GG and triple normal amounts in NEM, with calls dominating activity across the board.
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