Newmont Mining (NEM) is currently showing above average volatility with an IV Percentile of 82% and an IV Rank of 66.15%.
Today, we’re going to look at a short strangle trade due to the high IV percentile, that will profit if NEM stays between 90 and 125 for the next four weeks.
A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.
NEM SHORT STRANGLE
Traders that think NEM stock might remain stable over the next few weeks could look at a short strangle.
As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
For NEM stock, an April 17 put with a strike price of $90 could be sold for around $0.98.
Then the short call, placed at the $125 strike, could be sold for around $0.89.
In total, the short strangle will generate around $1.87 per contract or $187 of premium.
The profit zone ranges between $88.13 and $126.87. This can be calculated by taking the short strikes and adding or subtracting the premium received.
If price action stabilizes, then short strangles will work well. However, if NEM stock makes a bigger than expected move, the trade will suffer losses.
Note that NEM has already reported Q4 earnings, so this trade should not have any earnings risk if held to expiration.
The expected move for the April 17 expiration is currently $95.92 – $117.17.
COMPANY DETAILS
Newmont Corp. is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia and Ghana. Newmont's operating segments are N. America, S. America, Australia and Africa.
The N. America segment has operations in Mexico, Canada and in the U.S. The S. America segment is represented by operations in Suriname, Peru, Argentina and Dominican Republic.
The Australia segment consists of Boddington and Tanami. Newmont fully owns and operates the Tanami mine.
The Africa segment operations are represented by the fully-owned Ahafo and Akyem mines in Ghana.
Conclusion And Risk Management
One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $189, so we could set a stop loss equal to the premium received, or a loss of around $189.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $95 on the downside and $115 on the upside.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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