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The metals sector came under the spotlight yesterday, as the Federal Open Market Committee (FOMC) opted to forego any tapering plans at this time. Options traders rushed toward Barrick Gold Corporation (USA) (NYSE:ABX) throughout the session; more than 100,000 contracts changed hands, doubling what is seen in a typical trading day. Both put and call volumes were elevated, as speculators wagered on the central bank's decision. By the day's conclusion, ABX had spiked 9.7% to close atop the $20 level.
On the bull side, short-term traders focused on the September 18.50 call, which was the most active strike, with more than 8,000 contacts trading. The majority of the volume traded at the ask price, implied volatility rose 6.4 percentage points, and open interest grew by more than 3,500 contracts overnight, collectively suggesting some buy-to-open orders at this newly in-the-money strike.
In order for these call buyers to be profitable given the volume-weighted ask price (VWAP) of $0.47, ABX will need to remain north of $18.97 (strike price plus VWAP) through tomorrow's close. The option's delta surged from 0.44 on Tuesday evening to 0.98 currently, as the stock rallied Wednesday afternoon. In other words, the options market is pricing in a 98% chance that ABX ends the week above the 18.50 strike.
Elsewhere, one ABX put trader descended shortly after the opening bell, executing what appears to be a put ratio backspread. In short, the speculator sold to open 1,509 January 2014 18-strike puts (below the bid price at $1.88 apiece), and bought to open twice as many of the January 2014 16-strike puts (for $1.04 each, the ask price at the time). The position was opened for a net debit of $0.20 per spread, which is also the amount the strategy will lose (at expiration), if ABX is trading north of $18. The maximum potential loss, meanwhile, is $2.20, or the difference in strike prices plus the initial debit paid. Losses are capped right at the 16 strike.
The put ratio backspread enters profitable territory below the breakeven level of $13.80 (the long strike, less the maximum potential loss). Below this point, gains continue to mount as the stock falls, and are capped only at zero. The maximum gain, therefore, is also equal to $13.80 per spread.
Given the aggressive nature of this backspread (breakeven is more than 30% below the stock's current price of $19.76), this may have been an ABX shareholder looking for an inexpensive downside hedge. Barrick Gold Corporation (USA) (NYSE:ABX) shares have been in recovery mode since early July, but have recently seen increased demand for long put options.
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