As the Iran war enters another volatile phase, Newmont (NEM) seemingly makes for a great contrarian trade. Sure, NEM stock is currently sitting on an 88% Strong Sell rating by the Barchart Technical Opinion indicator. However, it’s possible that the escalation of hostilities could provide a temporary boost to the share price. Also, because NEM is down nearly 12% in the trailing month, it may be a positive mean-reversion candidate.
Another wrinkle to support the short-term bull case is Newmont’s upcoming second-quarter earnings report. On July 23 after the market close, the gold miner is scheduled to release its financial results, with analysts calling for earnings per share of $2.18 on revenue of $6.38 billion. Given the fact that Newmont has enjoyed generally strong results in recent quarters, another beat wouldn’t be out of the question.
For NEM stock, a bit of good news could be enough to help right a sinking technical ship. However, will it be good enough to change the longer-term trajectory? That’s where things get a little complicated.
On a fundamental note, you would expect that a rapidly spiraling geopolitical conflict — especially involving a critical waterway — would lead to a rise in the value of gold and other precious metals. But it’s not entirely clear if the valuation lift will be enough to tilt the scales in favor of NEM stock.
One obvious headwind from this conflict is the global energy market. Even if gold prices shoot up, the rising cost of fuels that power mining operations will also rise, thus cutting into profits. Another big issue stems from monetary policy. With the Federal Reserve previously being hesitant to reduce rates, going dovish now would likely exacerbate the inflation crisis.
So, it’s not a clear picture — and the smart money is making its thoughts known.
Volatility Skew for NEM Stock Paints an Uncertain Picture
Easily one of the most watched options expiration dates is for this Friday, July 24. When you look at the volatility skew, the chart shows a “smile” rather than a “smirk.” This description means that traders are paying a high premium for downside protection via out-the-money (OTM) puts but they’re also paying an elevated premium for upside convexity via OTM calls.
As such, the implied volatility (IV) on the left (put) side of the skew is elevated, just like the right (call) side, thus creating the smile curvature. Translation? Smart money traders are likely unsure where NEM stock is going to head. That’s why they don’t want to be caught unawares on the downside but they also don’t want to miss out on an explosive move higher.
This uncertainty appears to be the order of the day throughout the options chains for August. However, it’s intriguing that for the September monthly chain, the volatility skew shows a smirk: traders are paying a premium for OTM puts but are not paying an equivalent premium for OTM calls, leading to a flat trajectory on the right side of the chart.
While it’s difficult to draw a line in the sand, the smart money’s hedging behavior seems to point to pessimism toward Newmont stock over the intermediate period.
Looking at the Quantitative Picture for Newmont Stock
As previously noted, NEM stock has been struggling recently. Quantitatively, in the last 10 weeks, only two weekly candlesticks represented up weeks, leading to an overall downward slope. This 2-8-D sequence — which has materialized 16 times on a rolling basis since January 2019 — historically leads to poor performances.
Conditioned for the above signal, the expected forward 10-week distribution would land between $82 and $95 (assuming a starting price of $89.70), with probability density peaking at around $87. This forecast is conspicuously worse than the random baseline, which would likely see NEM stock land between $89 and $94.50, with probability density peaking at $90.90.
Nevertheless, the one good historical sign for the bulls occurs early at the end of the first week following the flashing of the 2-8-D signal. As a median expectation, NEM stock has demonstrated a tendency to rise about 1.9% or the nominal equivalent of $91.40. Because of the potential catalyst of the upcoming Q2 earnings report, I would argue that targeting the $92 level is quite reasonable.
With that in mind, I’m looking at the 90/92 bull call spread expiring this Friday, July 24. Breakeven lands at $91.19, giving the trade a probability of profit of 42.6%. However, of the 16 times that the 2-8-D signal has flashed, NEM stock has risen above the equivalent of $91.19 a total of 10 times. It’s possible, then, that the observed, conditional probability of profit is 62.5%, almost 2,000 basis points of “free odds.”
Still, there’s a chance that Newmont stock could continue its downtrend after the initial euphoria of a potential Q2 earnings beat has been digested. For those who are skeptical, the 87.50/85 bear put spread expiring Aug. 21 may be an aggressive but intriguing idea.
With this trade, the breakeven price sits at $86.27, with a probability of profit of 39.4%. However, under 2-8-D conditions, NEM stock has fallen below the $86.27 price eight times on week 5. Therefore, the observed probability of profit could be 50%.
