Call Trading in Barrick Gold (ABX): A Bullish Bet on the Yellow Metal?
Commodities such as gold, silver, and oil are extremely popular among the investment community as they are frequently used to measure economic health and demand in many parts of the world. Much of the world’s food, financial health, and energy revolve around the prices of these commodities.
At times, traders will use a stock or exchange-traded fund (ETF) as a proxy for something else (such as a commodity that is hard for the average stock investor to trade).
In other words, if a trader is not comfortable or approved for trading futures on commodities, they may use another security to accomplish their bullish or bearish goals. While this substitution may offer near-term price action that mimics the intended target commodity, the risks of investing in a single stock may sometimes outweigh the potential rewards of speculating on the rise or fall of the commodity itself. This is where a little extra time needs to be spent.
Let’s use gold as an example.
Today, we noticed a trader buying 10,000 Barrick Gold (NYSE: ABX) January 65 calls. This seemed to be a bullish bet on ABX on the surface, but what are the real risks here? If you were to look at a chart of gold futures versus ABX, they are fairly similar, although there are other factors with ABX that one must consider and times when the charts may disconnect.
Buying stock in an individual publicly traded company exposes the trader to risks that are completely unrelated to the price of gold. For example, if the company fails to report strong earnings, the stock may move out of sync with gold prices. In addition, the company’s management could become entangled in a lawsuit or scandal, or there could be a mining disaster or major equipment failure.
Volatility in the proxy stock may be markedly higher or lower than the underlying commodity, which could affect risk measurements, stop losses and targets.
All of these potential situations and more are real variables a trader must consider. That is not to say that non-futures traders cannot use a stock like ABX as a proxy, but they must be cognizant of any risks before diving in.
As for the calls that were bought, today ABX announced a strong earnings report and an increase in dividends; the company also noted some specific points:
They have
- The gold industry’s only “A” rated balance sheet;
- The gold industry’s largest unhedged production and reserves;
- Two advanced projects in construction that, with Cortez Hills, are expected to collectively contribute 2.4 million ounces of low cost average annual production at full capacity; and
- An unwavering commitment to safe and responsible mining.
Perhaps these, along with a bullish sentiment on the price of gold, are some of the reasons that this trader chose Barrick Gold as a long call play, but only the trader who bought those calls knows for sure. Remember the purchase of a call limits the risk to the premium paid, but has unlimited theoretical profit potential if the underlying moves above the breakeven price.
Photo credit: Brian Giesen
Share and Enjoy:
Related posts:
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
