In this analysis we have filtered out one of the most attractive trade ideas from 30 different option strategies for you to trade the publication of the quarterly results of Newmont Corporation (US ticker: NEM). The strategies were tested for different time periods, both before and after the quarterly results were released.
As a trade idea, a short put with a delta of 25 with an opening 2 weeks before the publication of the quarterly results and a closing on the day of publication stands out.
For the short put on NEM presented here, you can use the last 11 quarterly results to target an average profit premium of $ 49 per contract.
Brief company profile of Newmont Corporation
Newmont Corporation is engaged in the production and exploration of gold, copper, silver, zinc and lead. The company has offices and assets in the United States, Canada, Mexico, the Dominican Republic, Peru, Suriname, Argentina, Chile, Australia, and Ghana. As of December 31, 2020, it had proven gold reserves of 94.2 million ounces. Newmont Corporation was founded in 1916 and is headquartered in Greenwood Village, Colorado.
A look at the quarterly results
Newmont Corporation will publish quarterly results on October 28, 2021 prior to opening.
A look at the last 3 years (11 quarterly results were tradable in this period) gives us the strategies that have worked well so far. But that doesn’t necessarily mean that these strategies will work for the upcoming quarterly results. They only provide information about which options or combinations of options were able to show positive results in the past.
The so-called backtesting was carried out in such a way that the options were always traded at the midpoint between the ask price and the bid price. The time of trading, be it for the opening of the trade or for its closing, was always at the close of trading on the respective trading day.
A hit rate of 100% means that of the last 11 trades, 11 ended up winners.
In theory, a delta of 25 means that the probability of winning the short put is around 75%. In practice, the results were better with a hit rate of 100%. Even the worst trade made a profit of $ 17 per contract. However, that does not mean that losses cannot arise in the future!
The term is 10 trading days. Accordingly, it is a lightning-fast trade.
The trade will open on October 14, 2021 towards close of trading. On that day, a put with a maturity of October 29, 2021 and a strike price with a delta of 25 is sought and sold short (how to find the delta of 25, see the next paragraph). This collects a premium. On October 28, 2021, the trade will be terminated towards the close of the market: We buy back the short put to close it out.
How to find the option with the correct delta in the trading platform
You probably won’t find an option with a base price with a delta of exactly 25. At this point, the point is to choose a delta that is as close to 25 as possible. In case of doubt, a delta that is slightly below 25 is recommended. Note that the deltas of put options are negative and that the values you find in the option chains must be multiplied by 100. So for this example you are looking for a put with a delta of -0.25.
The lower the absolute value of the delta, the more likely it is that the associated option will expire worthless, which is the goal of a short put. So you can also opt for a delta of 15, for example. This increases your chances of winning; however, the possible profit bonus will then be lower.
The parameters of options are constantly changing, so that the base price with the appropriate delta is only a snapshot. The appropriate option should therefore be determined on the day the trade is opened, on October 14, 2021, around the close of trading between 9:00 p.m. and 10:00 p.m.
The margin requirement for this trade is shown in the preview of the trade placement or before the trade is submitted. It is important to note that the maximum risk of loss of the trade can significantly exceed this margin requirement.
Principle of the short put
With a short-term short put, you are betting on the one hand that the stock will ideally move upwards, sideways or slightly downwards and on the other hand that the implied volatility of this stock will fall significantly during the trade. A collapse of the implied volatility is a typical phenomenon at the time of the publication of quarterly results. In technical jargon one speaks of a so-called “volatility crush”. A short put would benefit from this decline in volatility, provided the stock doesn’t slide too far below the strike price of the put.
If the NEM share holds up above the strike price of the short put by October 28, 2021, the trade will be closed with a profit on that day with a high degree of probability.
This profit is limited to the premium received and will in practice be lower than this premium, since the trade is closed early 1 day before the option expiry date.
The loss, in turn, grows the lower the share falls below the strike price. For every $ 1 that the stock falls below the strike price, the put increases by $ 100. As soon as this amount exceeds the premium received, the trade moves into the red. However, it should be clear that the NEM share will not fall to zero, so that in practice the maximum risk of loss will remain limited.
If the trade is strongly positive during the term of the option, early profit-taking (i.e. before the targeted closing date) can be considered.
Newmont Corporation stock appears to have bottomed out after having been weak since June 2021. The stock is currently trading at around $ 55.39. From today’s perspective, the trade idea would allow the price to drop to the $ 53 mark without jeopardizing the maximum profit.
Conclusion: A historical average premium of around $ 49 in 2 weeks
With the trade idea presented here, there is a prospect of an attractive profit bonus within 2 weeks. Over the past 3 years, a Delta 25 short put on Newmont Corporation hit 100% of the time prior to the quarterly results announcement. So the statistical advantage is obvious. You can also adapt this idea of trade with binary trading. Binary options is known to be a more extreme version of options trading but can be very lucrative.
Be aware, however, that a general market correction or other company-specific event, even before quarterly results, can negatively affect the stock. The trade can end with a loss despite a promising profit history. The trade idea is only intended for risk-taking investors who believe that Newmont Corporation will do well in the coming days.
Trading quarterly results with options is and will remain a speculative endeavor. Even with the tailwind of statistics, option trades bring with them uncertainties that the trader must be aware of at all times. The willingness to accept the eventual loss or the placing of a stop loss are ways to deal with such trades.