Newmont Mining Corp. (NYSE: NEM) stock is dropping today as gold futures are falling hard (more than 2%) in this morning's market. Gold is falling as the dollar regains some of the ground it has lost recently. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on NEM.
The stock leapt last month from trading near its year low to a 52-week high of $48.42 on September 24, but quickly retreated to the mid-$40's. This morning, NEM opened at $45.45. So far today the stock has hit a low of $44.70 and a high of $45.48. As of 10:35, NEM is trading at $44.75, down $1.25 (-2.7%). The chart for NEM looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in 7 weeks as long as NEM is below $50 at November expiration. Newmont would have to rise by more than 11% before we would start to lose money.
NEM has not been above $50 at all in the past year, and has shown some resistance around $48.50 recently. This trade could be risky if traders continue to pile into gold as a hedge against inflation, but even if that happens, this position could be protected by the strong resistance the stock formed between $45 and $50 where it has topped out three times in the past year.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in NEM.
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