High Option Volume For Eldorado Gold

Jun.27.12 | About: Eldorado Gold (EGO)

Eldorado Gold (NYSE:EGO) claims to be one of the lowest cost gold producers, with mines located in China, Turkey, Brazil, Greece and Romania. In the company's Q1 2012 earnings call, the company noted the start of a couple of projects in Greece, near completion of the Olympias mill and start of construction at Skouries. In Romania, the company is making progress on permits related to the Certej project. Additionally, the first quarter results for Eldorado Gold were noted as typically being poorer, as a result of colder weather experienced in the Northern Hemisphere where a majority of the company's mines are located.

In February, the company completed the acquisition of European Goldfields and on June, 22, 2012 announced the promotion of Norm Pitcher to the position of President and Paul Skayman to the position of Chief Operating Officer.

Competitors to Eldorado Gold include Alacer Gold (OTCPK:ALIAF), Mediterranean Resources (private) and Zijn Mining Group (private).

A significant amount of call option volume was observed for Eldorado Gold on Friday June 22, 2012 as shown below:

Both the 2012 Aug 13 call option and the 2013 Jan 14 call option for Eldorado Gold were involved in heavy volume. The option volume was related to the opening of new positions which has a bullish flavor.

Eldorado Gold's stock price has been down over the last year and has recently bounced off of the $10 price and has increased to around the $12 range as shown below:

Based upon the company's Price-to-Earnings (P/E) ratio of 21, the company appears to be reasonably price, however Eldorado's Price-to-Sales (P/S) ratio of 6.7 places the company in the expensive range as compared to some of its peers such as Gold Fields (NYSE:GFI) with a P/E ratio of 10 and a P/S ratio of 1.95. Eldorado Gold's financial ratios are more inline with New Gold's (NYSEMKT:NGD) (discussed in this article) P/E of 23 and P/S of 5.5.

An investor seeking to invest in the Eldorado Gold, but wary of the high P/S ratio, might consider entering a married put position, as a married put enables unlimited upside while providing protection from a big drop in price. A married put position may be entered by purchasing a put option against a purchased or existing stock. The put option acts as "stock insurance", and by selecting a position further out-in-time the cost-per-day of the insurance is reduced.

Selecting to search for married put position for expiration in January of 2013 yields the following:

The married put using the 2013 Jan 14 looks attractive, with a maximum potential loss of 7.8%. So, even if Eldorado's stock price drops to zero, the maximum potential loss is 7.8%. A profit/loss graph for one contract of the Eldorado married put is shown below:

The position can be entered by purchasing the stock in the $12 range and purchasing the 2013 Jan 14 put option for $2.90. If the stock price increases to above the $14 strike price of the put option, income methods can be applied as described by RadioActiveTrading.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.