Newmont Mining Corp Expected to Dive Deeper

Schaeffer's Investment Research
  JUN 27, 2013 3:20 PM

Yesterday's bears ate up NEM's out-of-the-money LEAPS.

 


Newmont Mining Corp (NYSE:NEM) took a hit yesterday, bottoming out at a multi-year low of $27.07 as gold plummeted and Credit Suisse lowered its price target to $32 from $41. Even more, bearish speculators flooded NEM's options pits, snatching up 40,000 puts -- four times the daily norm.

Roughly one-fourth of this put traffic -- two blocks of 6,600 and 3,500 -- passed through the January 2014 19-strike for a volume-weighted average price (VWAP) of $0.74. Moreover, the majority of the contracts went off at the ask price, implied volatility increased by 1.9 percentage points, and open interest added 10,000 positions overnight, all implying heavy buy-to-open activity.

Since the start of 2013, NEM has plummeted almost 40%, and has underperformed the broader S&P 500 Index (INDEXSP:.INX) by more than 31 percentage points during the past three months. Therefore, by purchasing these out-of-the-money LEAPS, yesterday's put players anticipate NEM will continue its downward trek. Specifically, they expect NEM -- currently docked at $28.14 -- to breach the breakeven price of $18.26 through the close on Jan. 17, when these LEAPS expire. If the stock remains north of the 19 strike, the put buyers risk losing the initial premium paid per contract.

Despite its technical weakness, speculators have bought to open almost 250 NEM calls for every 100 puts throughout the last two weeks, according to the stock's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 10-day call/put volume ratio of 2.42. This ranks in the 54th percentile of its annual range, inferring that call activity is slightly heavier than usual.

Likewise, outside the options pits, eight of the 17 analysts weighing in on NEM endorse it at a "strong buy," while eight give it a "hold" recommendation, and one considers it a "strong sell." Furthermore, analysts' consensus price target stands at $41.16, a whopping 46% above current levels. Therefore, should NEM continue to underperform, another round of downgrades/price-target cuts could be in store, further pushing the stock south.

Finally, Newmont Mining Corp's Schaeffer's Volatility Index (SVI) sits at 43%, which ranks higher than 97% of other such readings taken throughout the year -- signifying that NEM options are relatively expensive right now.

This article by  Milissa Hudepohl was originally published on Schaeffer's Investment Research.

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