Is Now the Time to Strike on Goldcorp Inc. (USA) (GG) Options?

Technical support and an unwinding of negative sentiment could contribute to a Goldcorp Inc. (USA) (GG) rally

by Alex Eppstein

Published on Jul 22, 2016 at 11:30 AM

Gold stocks have been pulling back lately as the broader market has strung together win after win -- yesterday notwithstanding -- dampening the metal's safe-haven appeal. Among the laggards has been Goldcorp Inc. (USA) (NYSE:GG), which at $18.22 has lost over 10% since hitting an annual high of $20.38 in early July. So, should we expect more losses from the stock, or does the recent pullback present a potential buying opportunity for options traders?

Technically speaking, GG looks like it could bounce. The shares have been consolidating of late at their 80-day moving average, which has been a bullish signal in the past. In the last three years, this signal has flashed four times -- and the stock has rallied in three-quarters of those instances. Plus, even after accounting for GG's recent struggles, the shares have surged a cool 57.6% in 2016, easily besting the broader market.

The bearish sentiment backdrop also supports a potential contrarian bounce. Options traders have bought to open 1.18 GG puts for every call during the last two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). That ratio ranks in the bearishly skewed 88th annual percentile -- though, of course, some put buying could have come at the hands of shareholders hedging.

Echoing that put bias, GG's Schaeffer's put/call open interest ratio (SOIR) stands at an annual high of 1.72. In other words, puts outstrip calls by an extreme margin among options expiring in the next three months.

It's more of the same from the brokerage crowd. Currently, nine of 14 analysts rate GG a "hold" or worse, potentially setting the stage for future bullish brokerage notes.

With the gold miner set to report earnings after the close next Wednesday, strong quarterly results could spark a widespread reversal in sentiment. Following GG's last trip to the confessional in late April, the stock boomed 6% in the ensuing session. This time around, the options market is pricing in a similar 6.2% single-day swing.

Speaking of which, the market has tended to underprice Goldcorp Inc.'s (USA) (NYSE:GG) ability to make outsized moves over the past year, per its Schaeffer's Volatility Scorecard (SVS) of 71. On top of that, short-term options are pricing in relatively low volatility expectations, based on the stock's Schaeffer's Volatility Index (SVI) of 44% -- just 3 percentage points from an annual low.

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