The S&P 500 gained yesterday in sharp contrast to the decline that was recorded on Monday and Tuesday. Most bullish traders breathed a sigh of relief because of the positivity in the minutes of the FOMC meeting that was released earlier yesterday. However, stocks failed to maintain the rally today as all major indexes were down by midday. As at 12:47PM EDT, the S&P 500 was down 0.40%, the NASDAQ was down 0.41% and the Dow was down 0.46%.
The new trading pattern seems to be that of 1 day of gains followed by 2 days of losses and fears abound that this bullish market is coming to an end. However, instead of running away from trading stock options because of the wild swings being experienced in the market- I think we are better off with a new focus on options of companies involved in the production and mining of precious metals.
Barrick Gold in Focus
Barrick Gold Corporation (NYSE:ABX) with its market capitalization of $22.23B is engaged in the production and sale of gold, as well as related activities, such as exploration and mine development. The company produces copper mines and it holds other interests, including a nickel development project located in Africa.
Barrick Gold VS the S&P 500: Year-to-Date Performance
The chart above plots the stock of Barrick Gold against the S&P 500 in the year-to-date period. You will observe that Barrick Gold outperforms the S&P 500 with an 8.20% price change compared to a 6.35% price change. However, I am more concerned with chart pattern than with the percentage price change. You will observe that shares of Barrick Gold trades inversely with the S&P 500 because shares of Barrick Gold trades up at about the same time that SPX trade down and vice versa.
My submission based on this inverse trading relationship is that Barrick Gold might be the best-positioned stock for profit in options trading if all the fears of a market correction should become a reality.
Oil versus Gold
As new developments about tensions in Ukraine, Libya, (and possibly Nigeria) and insurgency in Iraq continues to make oil a rollercoaster ride for traders and investors, precious metals (especially Gold) might be the best way for option traders to obtain a semblance of certainty in this period of uncertainty.
For instance, demand for gold is increasing because Chinese and Indian consumers are piling up their gold hoards now that they consider it undervalued. Gold prices will continue to rise because the supply dynamics is stable. The demand for oil is on a steady increase; yet, the dynamics surrounding the supply of oil (black market, fracking, shale oil, conflicting news reports) does not necessarily mean that oil prices will rise as expected.
Increased Production on the Horizon
Barrick Gold is set to profit from the increasing demand for gold by increasing its production capacity. The company is expected to benefit from its major exploration programs- with the Pueblo Viejo and Pascua-Lama mines expected to be in full production capacity before the third quarter. More so, the company is working towards a $500M annual cost and efficiency improvement program.
How to Trade ABX Options
I am very optimistic about the potentials that ABX calls have going forward. I have a $22 price target on the stock in the next six months. Join me in buying the Jan 2015 20.000 call (ABX150117C00020000) at the current asking price of $1.41.
— Daily Option Alerts