October 30, 2017
3 minutes read
As the following graph shows, the price of shares in Agnico Eagle Mines Limited (AEM) appears to be on the verge of an upswing of unknown vigour. This new trend is confirmed by three indicators – the MACD, the RSI and the stochastic oscillator (%K) – that are giving clear signs of strength.
Daily chart for AEM ($59.06 on Thursday, October 26, 2017)
There can be no guarantees with this type of scenario, since a trend can reverse as quickly as it appeared. But an investor may want to take advantage of this potential upsurge by selling put options to profit from the time decay of options related to AEM’s relative stability and rising price. In addition, if the price of AEM falls, an investor who is not afraid to hold the shares could have an opportunity to buy AEM if, on expiration of the put options, the shares price closes below the chosen strike.
• Write 10 put options, AEM 180119 P 58 at $2.60
o Credit of $2,600 per contract
Profit and loss profile
If the put options are in-the-money on expiration, the investor will buy the AEM shares at a cost of $55.40, i.e. the breakeven price. This also represents some protection against a 6.2% drop in the price of the shares.
If AEM closes at a price above the $58 strike, the investor will not buy the AEM shares, and the premium received will represent the maximum return of 4.7% on the 85-day period, or 20.2% on an annual basis.
The static return, i.e. the profit generated by the position if the price of AEM is unchanged, is also 4.7% for the 85-day period, or a 20.2% return on an annual basis. The investor will not buy the AEM shares in this case, either.
This strategy can be implemented once, or it can be renewed on expiration of the put options on January 19, 2018 if the conditions are still right at that time. Should the price of AEM fall below the $58 strike, either before or on expiration, the investor will be faced with a decision. The options are to either do nothing and agree to buy the shares or liquidate the position by buying back the put options sold and absorb the resulting loss.
Good luck with your trading, and have a good week!
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
Monetis Financial Corporation
Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.