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Kinross Gold Corporation (USA) (KGC): Option Skeptic Sells Calls

A massive call sale dominated Kinross Gold Corporation's (USA) options pits

by 1/24/2014 10:21 AM
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Option Brief: Kinross Gold Corporation (USA) (NYSE:KGC) call volume exploded yesterday. By the end of the session, roughly 54,000 contracts had traded -- more than seven times the usual number of calls, and more than 100 times the number of puts. Easily the most active strike was KGC's March 5 call, where 51,231 contracts crossed the tape.

Digging deeper, the vast majority of the action at that strike took place as a block trade of nearly 44,000 contracts, just after noon. Open interest rose overnight, suggesting new positions were initiated. However, despite the block trading at the ask price, data from Trade-Alert indicates the positions were sold to open.

In so doing, the call writer gambled that KGC -- currently down 1.5% to dock at $4.66 -- will fail to topple the 5 strike by March options expiration. If he's right, then he will pocket the entirety of the premium received, which amounts to $879,120 (43,956 contracts * 100 shares per contract * $0.20 premium). If the speculator is wrong, however, he could face theoretically unlimited losses, as he'll be forced to sell the shares for $5 apiece, no matter how much they've risen.

From a technical perspective, one can understand the rationale behind yesterday's big out-of-the-money call sale. After all, KGC shares are down more than 47% year-over-year, and haven't sniffed territory north of $5 since mid-November. Nevertheless, the stock has fared well so far in 2014, adding nearly 7%.

On the fundamental front, Kinross Gold Corporation (USA) (NYSE:KGC) is slated to report fourth-quarter earnings after the close on Wednesday, Feb. 12. Historically speaking, the gold miner has topped analysts' bottom-line estimates in five of the past eight quarters, for an average one-day gain of 3.8% -- obviously, not good news for yesterday's call writer.


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