Agnico Eagle Mines- Options Spread

For the first time on my blog I will be going over a stock just to be able to establish a bull-call spread on it. More details on the strategy is below. Agnico Eagle Mines is one of the largest and best run gold companies in the world. The company has excellent growth prospects with properties around the world and with the current forecast for gold in the $2000 per ounce region this stock definitely is a gold mine (no pun intended).

However, AEM has fallen almost 20% in the past month due to heavy short selling. AEM definitely falls prey to volatility in gold prices so it definitely is not for the faint at heart. However, I believe we have an excellent entry point right now with the RSI (Relative Strength Index dipping below 30 and AEM finding support at its lower trend line.

 Due to the volatility in this stock lately, however, I would advise limiting your risk. One of the best ways of limiting your risk, while participating in an upward move is by executing a bull-call spread. A bull-call spread is essentially a conservative way of playing the call option on a company.

If you would like a refresher course about a bull-call spread it is available at this link.
http://www.optionseducation.org/strategy/bull_call_spread.jsp


Establishing a bull-call spread involves the purchase of a call option on the same underlying stock with the same strike price and expiration while simultaneously selling a call option with a modestly higher strike price with the same expiration. The way it is different from a regular call buy is that you are partially offsetting the premium on the long call using the premium from the short call.

Disclosure: We are going to play the options on the Canadian side as the contracts are in $2 increments and therefore we have a better strategy based on where the stock price is. Moreover we are using February contracts and the prices are based on the close price on January the 12th 2011

Maximum Profit = (Strike(H)-Strike(L)) - (Premium(L)- Premium(H))= (78-72)-(3.30-1.32)= $4.02
Maximum Loss= Premium (L) -Premium(H)= $1.98

So essentially you get to participate in the upside of the stock up to a $4.02 profit and if you are wrong the net price of your in the money call is $1.98 as opposed to $3.30. So all in all not a bad risk reward proposition?