Put Selling Opportunity Looks Ready For Barrick Gold

Put Selling as a principal investment method can be hindered at times by low volatility. Lately the overall market direction has been moving higher and as the economic news has been supportive and unemployment numbers decreasing, investors are feeling pretty good about stocks. This is pushing volatility lower in the overall markets reducing Put Selling profits. But not all stocks are responsive to overall market volatility. Many stocks have their own volatility levels that are higher than other stocks which continues to make Put Selling more profitable. A good example would be Apple Stock which has a 20 day historic volatility level of 30% or better at times and Google is another such stock.

Barrick Gold by the nature of the commodities it mines has a normal volatility of usually 30% or slightly higher. This helps keep option premiums up and allows me to profit from Put Selling. During the market crash of 2008 to 2009 volatility at times was double this and put premiums even for far out of the money puts were often 3% for 30 days making Put Selling very profitable. Fond memories of Put Selling a panic!

Barrick Gold trades on both the New York Stock Exchange and the Toronto Stock Exchange. I normally trade it on New York, but the same trades can usually be done on Toronto as well. The big difference is option volumes which are better on New York. Barrick Gold’s symbol is the same on both exchanges – ABX.

Put Selling Barrick Gold

I have done Put Selling on Barrick Gold for years. I keep it on my watch list of stocks and look for Put Selling opportunities. Such an opportunity looks promising to start the week and I will be looking at it come Monday.

The Barrick Gold Chart below shows the key aspects which I look for in a stock such as Barrick Gold for Put Selling opportunities.

A. The Stock is pushing hard against the Lower Bollinger Band. I am using the default settings of 20 and 2 for the Bollinger Bands. The stock has fallen hard here and is pushing down a little heavier than in previous pullbacks. This could signal a move lower which will push up the put premiums on the two put strikes I have been using – $32 and $31 which is exactly what I want for Put Selling Barrick Gold.

B. MACD gave a sell signal on the stock on Thursday Jan 24 2013. So it’s a heads-up that the stock could push lower and hit more volatility pushing the put premiums up.

C. The Ultimate Oscillator is oversold. A reading of 33.24 for the Ultimate Oscillator is NOT extreme but it is oversold. Often this oversold indication is followed by a pop back up for the stock which evaporates the put premiums quickly which is why I would want to do my Put Selling on Monday if possible.

D. The Fast Stochastic shows a bounce started on Thursday in the stock. The fast stochastic is very oversold which often leads to a bounce higher which again means I need to consider Put Selling asap.

Put Selling Barrick Gold

Put Selling Opportunity in Barrick Gold

Put Selling Strategy For Barrick Gold

There are a number of bearish warnings signs besides those above including the moving averages which are turning short-term bearish that when Put Selling it is important to be aware of just in case the stock falls deeper than I expect. The 21 day moving average and the 50 day moving average have both been violated. You can see in the chart below that Barrick Gold has been unable to recapture the 50 day for sometime and the longer-term chart looks even worse on Barrick Gold. It is this decline in Barrick Stock though that has brought it back to my Put Selling portfolio since the decline has pushed up put premiums at long-term support which rests at $31 to $32 which are the same strikes I have been Put Selling.

Put Selling Barrick Gold Jan 25 2013

Put Selling always has some degree of risk. The best premiums are when a stock is declining.

There is always risk when Put Selling a declining stock, but then that’s also when the put premiums are the best. When the stock turns and bounces higher the put premiums evaporate. This is the exact trade I want to see happen.

On each downturn in the stock I have done Put Selling in small lots until I reach about 40 put contracts. In most instances I have sold the $32 and $31 put strikes. When the stock bounces up, I buy to close and lock in the profits on the $32. So far I have left the $31 puts to expire.

Put Selling Options On Barrick Gold

Below are the put options for Feb 16 2013 options expiry. You can see that the $32 put strike is nearing 2% but the main interest lies in the $31 put stike for a lot of option traders as you can see from the volume. I have been primarily Put Selling the $32 put strike and usually Put Selling for .52 cents and closing for .25 cents to .28 cents profit after commissions. Sometimes though Barrick Gold falls a bit harder and drives up the $31 put strike which it did once in November and again in December. When that happened the $31 reached .30 to .35 cents which I again immediately was busy Put Selling. The $31 puts I have so far let expire as I couldn’t see Barrick Gold falling that far at that time.

Put Selling options on Barrick Gold

Put Selling options on Barrick Gold

Put Selling Returns on Barrick Gold

The Put Selling returns made on Barrick Gold have been very good, but the percentage returns vary depending on how you want to do your calculations. I prefer calculating my Put Selling returns based on the amount of capital I would need if suddenly the stock plunged and I was assigned shares overnight. For example, holding 40 put contracts means being assigned 4000 shares of Barrick Gold at $32 which would require $128,000.00 of capital.

If I make .25 cents on the trade that means a total profit of .25 X 40 put contracts = $1000.00. My Put Selling returns then are $1000 / $128,000 = 0.78%. So the return is not even 1%.

Other investors though calculate Put Selling returns as the number of days held against the entire year. This annualized method of calculating Put Selling returns looks at the trade lasting  just 4 days against 365 annual days. Therefore if I earned $1000 for 4 days even though I might have needed $128,000 the Put Selling return takes into account that I made 0.78% in just 4 days. Wow, suddenly the Put Selling return because it has been annualized becomes a huge figure which I won’t even repeat here but I am sure you have seen them all over the internet.  “Make 400% in 1 week” – that sort of thing. I believe you should be cautious with these figures and not get too excited. What they often do not show is huge losses when they lose $1.00 on an option in 3 days for example.

Still others calculate the Put Selling returns based on just the cost of the trade itself which again brings up a huge figure. Whatever method you choose be aware that in the end what really matters is did you get out with a profit, was the risk acceptable and how has it added to the overall portfolio.

No matter how the return is calculated, risk of loss is always there which is why I prefer looking at the trade against my overall goal of aiming for 1% for the entire portfolio each month and/or 12% annualized return on my entire capital invested.

Since the start of January I have done this Put Selling trade twice in Barrick Gold and each time earned $1000.00. My Put Selling return so far in January then is 1.5%.

Put Selling Barrick Gold Summary

To sum it up then, I like Barrick Gold for Put Selling. Since it pulled back in November it has been a stellar Put Selling performer but I have never held the $32 put options to expiry. When Put Selling resource based stocks I prefer to grab my profit and close the trade, ending the risk of assignment.

Put Selling Barrick Gold Nov 2012 to Dec 2013

Put Selling Barrick Gold Nov 2012 to Dec 2013

Since the stock fell in earlier November I have done Put Selling in Barrick Gold 5 times. Each Put Selling trades has been at the $32 and $31 put strikes and to date I have brought in $5525.00 using about $128,000 in capital. This latest downturn appears a bit weaker than the previous 5 Put Selling periods, but on Monday I will keep an eye and look for signs the stock may bounce. That will be my clue to get busy selling puts for what I hope will be another profitable Put Selling trade in Barrick Gold.

I am showing this Put Selling trade idea to give other investors some idea as to the thinking involved and the chart and technical studies I often do on my favorite stocks to determine their suitability for a trade. Remember the disclaimer.  There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done.

Remember when I am Put Selling Barrick Gold I would accept shares if the Put Selling trade did not work and I was assigned shares. I would then use various rescue strategies to work the stock back to a profit and exit the trade. Remember too that if you have not done Put Selling before seriously consider paper trading to learn the strategy while protecting your capital from risk of loss.

  • Hi Jake
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