Because the trader owns the October 40 calls, he or she has the right to buy Goldcorp shares for $40 at any point through Oct. 19. Those contracts are highly leveraged to movements in the share price and can double, triple, or more if the stock gains just 20 percent to 30 percent.
The investor also sold other options to reduce the cost and enhance gains even further, but the move comes with consequences. Because the puts were sold, the trader is now obligated to buy stock for $36 if it falls that low. The position will not benefit from any gains above $48.
The net result is that the trader collected a small credit and can earn a maximum profit of $8 per share if Goldcorp closes at $48 or higher on expiration. The investor also faces potential losses to the downside, so it’s similar to owning stock. The main difference is that the entire position will expire worthless if the shares remain between $36 and $40.
Goldcorp shares rose 1.06 percent to $39.12 on Friday. It’s down more than 20 percent in the last three months and is trying to hold the same area, where it bounced in July 2010. Another miner, Eldorado Gold, also had bullish activity in the session, and Pete Najarian recently cited similar activity in the SPDR Gold Shares Trustexchange-traded fund , which tracks bullion prices.
Overall option volume in Goldcorp was six times greater than average on Friday.
—Russell has no positions in any of the stocks cited in this article.
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David Russell is a reporter and writer for OptionMonster.