First Majestic Silver Stock Flashes a Bullish Signal

Options traders have been picking up bullish bets on First Majestic Silver Corp (AG)

Feb 23, 2017 at 3:11 PM
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After slumping through the later part of last year, silver prices bottomed out in mid-December, and have been steadily rising since. Shares of First Majestic Silver Corp (NYSE:AG) have followed a similar pattern, though an earnings miss yesterday sent the stock slipping back toward its 320-day moving average -- a trendline that ushered AG lower from early 2013 through early 2016 before taking on a supportive role. But if recent past is prologue, this pullback may be a bullish signal for the shares, which are in recovery mode today, up 3.8% at $9.68.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, AG has pulled back to its 320-day trendline three times in the past three years. And while such a pullback hasn't been an immediate boon to the shares, 21 days after such a signal the stock has been positive 100% of time. Moreover, the shares have generated an average return of 10.8% over this period.

This could be good news for options traders, who have been favoring bullish bets on AG. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have purchased nearly seven calls for each put over the past 10 weeks. Moreover, the resulting call/put volume ratio of 6.91 ranks just 10 percentage points from an annual high. Echoing this, AG holds a Schaeffer's put/call open interest ratio (SOIR) of 0.30 -- showing call open interest more than tripling put open interest among options in the front three months' series -- a ratio lower than 97% of all readings in the last 12 months.

It's certainly an appealing time for short-term options buyers to strike on AG. The stock's Schaeffer's Volatility Index (SVI) of 62% is seated in the low 18th percentile of its annual range, while its 30-day at-the-money implied volatility of 61.8% ranks in just the 3rd annual percentile, likely due to a post-earnings volatility crush. Put simply, these readings indicate the equity's near-term options are currently well-priced, from a volatility standpoint. What's more, AG boasts a Schaeffer's Volatility Scorecard (SVS) of 92, suggesting the shares have outperformed the volatility expectations the options market priced in over the past year.

Outside of the options pits, there's also plenty of optimism toward the stock. Two-thirds of tracking analysts rate AG a "buy" or better. Still, there may some buying power left on the sidelines. Short interest has been on the rise in recent months, climbing 15.5% in the latest reporting period alone, to represent 8.5% of the stock's total float. Against this backdrop, it's possible some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to shorts seeking an options hedge.

Technically speaking, First Majestic Silver Corp (NYSE:AG) shares have explored a wide range over the past 12 months. The stock skyrocketed nearly 800% from its 2016 low to August's three-year peak of $19.15, but has given up about 50% since then. However, the $8-$9 area is not only home to the aforementioned 320-day moving average, it also represents a 61.8% Fibonacci retracement of that 2016 rally, possibly reinforcing support in the region.

AG Daily Chart February 23

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