Chart courtesy of Stockcharts
Today we purchased the September $65.00 PUT contracts in Randgold Resources Limited (GOLD) in anticipation of a pullback for $5.00 per contract. Randgold now looks vulnerable as the stock price has increased from $41.59 on 17th April 2009 to $70.93 today, an increase of 60% in two months. The P/E ratio is 148 which is massive when compared with Yamana (AUY) at 15 or Goldcorp (GG) at 17 and Newmont (NEM) at 31.
The yawning gap between the stock price and the 200dma suggests that this aberration will cannot remain as is and either the the average has to move up or the stock price has to move down in order to return to the 'norm'. A correction of around $10.00 should see these options double in price and thats what we are gunning for.
We are using Randgold as the vehicle to protect our portfolio and consider the purchase of a few PUTS to be an insurance against a possible sell off in this sector. These contracts should increase in value should the gold producing sector take a bit of a plunge. If the sector makes gains then the PUTS will fall in value but the fall will be compensated for by the gain in the value of the portfolio.
To place a down bet in a bull market is a hard call to make so go gently with this one. If we can get the oscillations right then it may be a case of moving swiftly to lock in profits and then considering CALL options for a possible short term bounce.
On the 28th May 2009 we sold our entire holding of Randgold for an average price of $68.69 for a return of 82.44% as the company appeared to be overbought at the time.
You can now sit back and watch us sweat as this is a tricky time to trade these stocks.
Randgold Resources Limited trades on the NASDAQ under the symbol of GOLD and on the London Stock Exchange under the symbol of RRS.
Have a sparkling day.
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