Barrick Gold Corp (USA) (NYSE:ABX) is technically interesting. I can argue both side of the coin. Bulls can say that it’s basing at these levels to remount an upward effort. Conversely, bears would say that it’s setting lower highs while knocking on the floorboards.
If the bears are correct and if the board breaks then ABX stock could retest $15.50. Otherwise, the bounce should push towards $17.50.
Since I prefer profiting from selling risk whose purpose is to expire worthless in my favor, I can bet against either of those scenarios. I will sell risk against levels that are not likely to occur for either bulls or bears.
Fundamentally, ABX is relatively cheap from a price-to-earnings perspective. It also carries better margins than most of its competitors. Add to it that it also pays a dividend and you’ve got a pretty solid fundamental footing in that space.
Click to Enlarge Furthermore, ABX is somewhat dependent on Gold prices, which are now in limbo but strong. Gold just had a nice rally. I am of the opinion that it will be an upward-biased range for the year.
But since ABX is a company, it is also dependent on the markets in general, and those are at all-time highs. The new highs did not come from an improvement in fundamentals as we are still running on Trumpian hopium, and the timing for those is iffy.
I am not a fan of shorting stocks by selling calls, so to generate income today, I will sell downside risk against proven support. Levels are important, and Barrick is just above the midpoint of a four-year range. My thesis will be that ABX will not fall 14% in the next five months, and if so, I’d be a buyer there.
ABX Stock Trade Idea
The Trade: Sell the ABX Oct $14 puts for 50 cents per contract. Here, I have an 80% theoretical chance that I will retain maximum gains. But if price falls below my strike, I will own the shares and suffer losses below $13.50.
Selling naked puts is dangerous, but I can reduce the risk by using spreads.
The Milder Alternate: Sell the ABX Oct $14/$13 credit put spread where I have the same chance of success but with a smaller risk profile. Yet the spread can still deliver over 25% in yield. Compare this with buying the shares here and needing a 25% gain just to match the performance of the spread.
Selling options is risky business, so I only risk what I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.