On Monday, The New York Times reported that the German government collapsed, coming at a particularly challenging time. The news follows political chaos in France, which has compounded regional concerns of tepid growth and security risks. Cynically, though, investors may turn to the historical safe haven of precious metals.
Of course, the problem with this approach is the lack of leverage. At the moment, the spot gold price stands roughly around the $2,700 level. Thanks to the law of large numbers, it’s going to be difficult to see significant price movements from here on out. For those seeking big returns over a short period of time, a proxy play may be more appropriate and that’s where First Majestic (AG) comes into view.
Focused on the production, development, exploration and acquisition of silver and gold mines, First Majestic carries a market capitalization of 2.54 billion CAD. It’s big enough to be big but it’s also quite small compared to the giants in the mining space. That means the security itself should feature significant kinesis: higher risk for higher reward.
For the ultimate speculator, AG stock is also an “optionable” security. By buying a straight call option, a trader enjoys the leverage of 100 shares of the mining specialist. However, a more nuanced approach with the bull call spread may be attractive.
Jumping on AG Stock Ahead of the Crowd
Curiously, AG stock slipped almost 2% on Monday despite its potential as a precious-metal proxy play. The volatility might be explained by concerns over the Federal Reserve cutting interest rates despite the rising threat of resurgent inflation. Still, the geopolitical uncertainty in the eurozone could cynically bolster commodity prices, which in turn could lift First Majestic.
Notably, activity in the derivatives market picked up conspicuously on Monday. Total options volume for AG stock hit 21,504 contracts against an open interest reading of 611,480 contracts. Against the trailing one-month average metric, Monday’s volume stood at 106.55% up. Further, call volume outpaced put volume, 19,802 contracts to 1,702 contracts.
It must be said that options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — showed relatively split sentiment. Here, net trade sentiment sat at $8,900 below parity, slightly favoring the bears. Still, the main takeaway is that among bullish professional investors, heightened inflows targeted the $6 and $7 calls, with expiration dates ranging from Dec. 27, 2024 to April 17, 2025.
Interestingly, a stochastic analysis of various options chains — which involves multiplying the share price, implied volatility and time decay adjustment — shows that these price targets are within reason. For example, the stochastics of the April 17, 2025 expiration date reveals that the market anticipates a positive or negative movement of $2. So, if the bullish scenario materializes, the $7 call could be a very lucrative trade.
A Daring but Enticing Wager
For those interested in a high-risk, high-reward wager, the 5.50/6.00 bull call spread for the options chain expiring Jan. 3, 2025 may be worth a long look. In this transaction, you would buy the $5.50 call. At the same time, you also sell the $6 call, using the credit received from this short call to partially offset the debit paid of the long call.
As of Monday’s close, the debit required for the trade was $47, which also represents the most you can lose. However, should AG stock reach or exceed the short call strike of $6.50, you would collect the maximum reward of $53 or a payout of 112.77%. What’s more, the breakeven point for this transaction comes in at only $5.97, just a nickel above Monday’s final price.
Conducting a stochastic analysis, the market anticipates a positive or negative movement of 65.5 cents. If the bullish scenario materializes, this would put AG stock potentially at nearly $6.58. Given that $6 represents a psychologically significant technical support line, it’s possible that the bulls may use this point as a staging area.
Plus, there’s a lot of uncertainty in the air right now. Historically, such a framework bodes well for precious metals. And that could mean incoming upside for AG stock.
