No one has a crystal ball. However, when it comes to the equities sector, about the closest thing you can get to one may be the Unusual Stock Options Volume indicator. A daily compilation of the most unusual activity in the derivatives market, this screener notifies retail investors about the potential opportunities the smart money may be targeting with its funds.
An intriguing enterprise that stood out following Monday’s close is precious metals specialist New Gold (NGD). Based in Toronto, New Gold operates in the exploration and development segment of the gold-mining value chain. It specifically focuses on the Afton Copper-Gold Project, which is located 6 miles (or 10 kilometers) west of Kamloops, British Columbia.
Because of the exploration and development – which is similar to the upstream component of the energy space – NGD stock is risky. At the same time, for those willing to handle the heat of intense volatility, New Gold may see significant upside. It’s unpredictable because one never knows for sure how a project will turn out. But hit it big and the underlying security might skyrocket.
That could be the case for NGD stock. Later today – after the closing bell – New Gold is scheduled to release its second-quarter earnings report. Analysts are looking for earnings per share of 1 cent on revenue of $214.31 million. What makes the company so enticing is that in the prior two quarters, it beat the consensus target for sales.
At this moment, NGD stock trades for only 1.78X sales, below the sector median of 2.92X. Further, the aforementioned options data implies optimism for a big beat.
Traders See a Big Move Ahead for NGD Stock
Following the close of the July 29 session, NGD stock represented one of the top highlights in Barchart’s screener for unusual options volume. Specifically, total volume hit 10,411 contracts against an open interest reading of 62,685. This figure represented a 569.95% lift from the average trailing-month volume.
Drilling into the details, call volume only came out to 276 contracts while put volume hit 10,135 contracts. Ordinarily, that might be cause for concern. After all, puts give holders the right (but not the obligation) to sell the underlying security at the list strike price. That would seem awfully bearish for NGD stock.
However, for every option bought, it must be sold. Therefore, it’s also important to understand which side of the trade the smart money is on. That’s where the options flow screener comes into play, which filters exclusively for big block transactions likely placed by institutional or professional investors. On Monday, net trade sentiment in the screener stood at $3,600, favoring the bulls.
What’s more, options with bearish sentiment sat at $0. What about the 10,135 put contracts? Barchart identified this transaction as a neutral sentiment play. It’s possible that investors were placing that bet to hedge their holdings.
Most importantly, NGD stock in the open market is only priced a few cents above two bucks. Therefore, the options premiums are dirt cheap and that’s not exactly a great thing. When looking at the options chain, it’s not uncommon to find derivatives with bid-ask spreads around 50%.
In other words, you really have to be confident that NGD stock is going to play out how you think. That’s why New Gold should be on your radar.
Supportive Fundamentals and the J-Hook
A few weeks ago, I mentioned that Barchart identified NGD stock as a potential J-Hook candidate. A sinusoidal technical pattern, a publicly traded asset must meet rigorous criteria before Barchart’s algorithm gives the green light. Following the flashing of the signal, it’s possible that shares could swing higher.
Admittedly, since the J-Hook flashed for New Gold, NGD stock slipped conspicuously. Nevertheless, it’s intriguing that bullish sentiment is moving into the company on the eve of its Q2 earnings report.
Another factor to consider is the fundamental catalyst: the Federal Reserve. Increasingly, it appears that the central bank will lower the benchmark interest rate. If that happens, money velocity should accelerate. That’s good for broader economic activity, which translates into inflation. Therefore, NGD stock should be a beneficiary.
As stated earlier, it must be stressed that New Gold is a risky, speculative venture. It’s not guaranteed to move higher. Nevertheless, with the smart money placing its bet on the gold exploration firm, NGD stock is a tempting proposition.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
