Newmont shot higher Wednesday as the price of spot gold smashed through $1,840 an ounce. The precious metal has gained favor recently as an inflation hedging tool amid the worst U.S. inflation in nearly 40 years.
A few weeks ago, we looked at how to use options to generate income from gold investing, and today we're looking at an option trade in one of the top gold mining stocks.
Newmont stock is above all key moving averages and broke out above resistance around 62 Wednesday. The stock appears to be forming a long cup base.
Investors who think NEM stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (the strike price) up until a certain date (the expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
$6,500 Vs. $1,100 For Gold Investing Trade
If investors want to buy 100 shares of Newmont stock, they would have to invest around $6,500 at the current share price.
Instead, an investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If an investor were to buy one NEM 55 call option expiring on June 17, they would only need to invest around $1,100 rather than $6,500.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even 66.00.
The most the trade can lose is the premium paid of $1,100, which would occur if NEM stock finished below 55 on June 17.
However, if the stock shoots higher, the upside is unlimited.
Gold Investing Option Offers Exposure With Less Capital
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the June 17, 72.50 call would reduce the trade cost by around $235 but would also limit the upside above 72.50.
Newmont is set to announce earnings Feb. 24, so this trade would have earnings risk if held to expiration.
NEM stock is ranked No. 5 in its industry group and has a Composite Rating of 76, an EPS Rating of 78 and a Relative Strength Rating of 80.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
