A Relatively Safe Earnings Trade On Barrick Gold

May. 1.12 | About: Barrick Gold (ABX)

Perusing through this week's earnings calendar, I stumbled on a trade that I feel makes a lot of sense. The company that I will be using this options strategy on is Barrick Gold Corp. (NYSE:ABX).

Barrick Gold engages in the production and sale of gold and copper. The company has a portfolio of 26 operating mines, and exploration and development projects located in North America, South America, the Australia Pacific region, and Africa. It also holds interests in oil and gas properties located in Canada. Barrick Gold Corporation was founded in 1983 and is headquartered in Toronto, Canada.

Barrick Gold is scheduled to report earnings on Wednesday, May 2, 2012, before the market opens.

Currently, Barrick Gold is trading at $40.43/share. The 52-week range is $38.46 - $55.95.

  • 52wk high: 55.95
  • 52wk low: 38.46
  • EPS: 4.48
  • P/E: 8.70
  • Div Rate: 0.60
  • Yield: 1.484
  • Market Cap: 40.45 B
  • Volume: 6.11 M

The stock is nearing its 52-week high, but with the strike prices I am choosing to use here I do not foresee a problem with this trade working out well.

The strategy I am going to implement is the 'reverse iron condor' spread. This trade is placed a debit spread and its risk is known from the outset. The trade has four (4) legs and does require a higher level trading account, usually a Level 3 or Level 4, depending on your broker. The 'reverse iron condor' spread is a neutral-based strategy that is a limited risk and a limited profit option trade. I have always been extremely successful using this strategy with stocks that have historically made moderate to large price moves after reporting earnings. Please see my past articles on this excellent strategy and others.

In choosing the strike prices for this trade, I am being extremely conservative here. I want to keep the risk to a minimum and the probability high. Therefore, the strike prices will be very narrow compared to where the stock is currently trading at.

Here is how the trade is placed accurately. (For example purposes, I will only use one contract for each leg):

  • Buy one (1) out-of-the-money put option
  • Sell one (1) out-of-the-money put option (LOWER STRIKE)
  • Buy one (1) out-of-the-money call option
  • Sell one (1) out-of-the-money call option (HIGHER STRIKE)

In regards to this specific Barrick Gold trade, I will be using the following strike prices:

  • Buy (20) ABX May Week 1 $40.00 put options
  • Sell (20) ABX May Week 1 $39.00 put options
  • Buy (20) ABX May Week 1 $41.00 call options
  • Sell (20) ABX May Week 1 $42.00 call options

Requirements

Cost/Proceeds $1,420.00
Option Requirement $0.00
Total Requirements $1,420.00
Estimated Commission $100.00
Click to enlarge

Current Price: $40.43

Price Profit / Loss ROI %
29.25 $580.00 40.85%
33.71 $580.00 40.85%
38.41 $580.00 40.85%
39.00 $580.00 40.85%
39.29 $0.00 0.00%
40.00 ($1,420.00) -100.00%
41.00 ($1,420.00) -100.00%
41.71 $0.00 0.00%
42.00 $580.00 40.85%
43.11 $580.00 40.85%
52.50 $580.00 40.85%
Click to enlarge

Of course, you can widen the strike prices, but I would be extremely careful doing so. The trade as it is presented here is the safest way to play this. Widening the strikes can possibly bring a much higher return on investment, but also raises the risk much higher. A 40% profit is nothing to be disappointed in, and I am confident that the trade should work well here.

If you have any questions, please leave a comment or send me an e-mail.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours.