Option Activity Alert: Newmont Mining, Cal-Maine Foods

NEM – Newmont Mining Corp. – The gold producer’s shares started strong this morning, but earlier gains quickly gave way to losses and shares are currently down 3.00% to stand at $60.75 as of 3:25 pm in New York. Options on gold companies as well as options on a number of ETFs tracking miners and gold producers were very active today after gold prices climbed to new highs this morning. During the first couple of hours of the session one bullish trader utilized long-dated call options to position for Newmont Mining’s shares to potentially rally to new heights by expiration in January 2012. The investor purchased 5,800 deep in-the-money calls at the January 2012 $57.5 strike for a premium of $12.23 each, and sold the same number of calls at the higher January 2012 $67.5 strike at a premium of $7.53 apiece. The net cost of putting on the spread amounts to $4.70 per contract. The trader is therefore prepared to make money should NEM’s shares trade above the average breakeven price of $62.20 through January 2012 expiration. Maximum potential profits of $5.30 per contract pad the investor’s wallet if Newmont’s shares jump 11.1% over the current price of $60.75 to surpass $67.50 ahead of expiration day.

CALM – Cal-Maine Foods, Inc. – Options on the largest egg seller and distributor in the U.S. are more active than usual today perhaps on news the Jackson, Mississippi-based firm recalled more than a quarter of a million eggs purchased from Ohio Fresh Eggs because they may be contaminated with Salmonella. Cal-Maine Foods was reportedly alerted to contamination issues with the eggs by the FDA this past Friday. CALM’s shares reacted positively to the news this week, rallying more than 12.0% off Monday’s intraday low of $28.68 to today’s high of $32.15. Shares are currently up 4.4% at 30.90 as of 1:20 pm. Bullish players expecting shares to climb higher ahead of expiration day this month picked up 1,200 calls at the November $30 strike for an average premium of $0.86 each right out of the gate this morning. Call buyers start accruing profits above the average breakeven price of $30.86. The sharp rise in the price of CALM’s shares lifted premium on the now in-the-money call options, which currently command an asking price of $1.40 apiece. In contrast to near-term bullish patterns, activity in longer-dated option contracts on the egg seller appears to be the work of an investor wary that shares may pull back ahead of February 2011 expiration. It looks like the trader purchased a put spread, buying 1,000 contracts at the February 2011 $30 strike for an average premium of $1.91 each, and selling the same number of puts at the lower February $25 strike at an average premium of $0.525 apiece. The net cost of the spread amounts to $1.385 per contract. Thus, the put player is prepared to profit, or realize downside protection, if CALM’s shares fall 7.4% from the current price of $30.90 to breach the average breakeven point on the spread at $28.615 by expiration day. Maximum potential profits of $3.615 are available to the investor if shares in Cal-Maine Foods plummet 19.1% to trade below $25.00 by February expiration. News of the recall and the sharp rise in demand for options on CALM boosted the stock’s overall reading of options implied volatility 21.6% to 38.42% this afternoon.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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