EOT Trade Alert – February 4, 2010
February 4, 2010
Trade Alert:
Buy AEM May 22 2010 $45 Puts at $2.95 or better
Company Background:
Agnico Eagle Mines (AEM) is a gold producer with mining, mine construction, and gold exploration projects throughout North America and Europe.
Short-Term Catalyst:
Over the last year, uncertainty and fear of inflation have driven the price of precious metals to all time highs.
Now new fears of a different sort have gold and the companies who mine it under the gun. And these fears aren’t good gold prices.
EuroZone troubles spell disaster for the Euro.
In an ongoing saga, governments in Greece, Portugal, and Spain have a budget crisis. Deficits are ballooning at an unsustainable pace. Investors are worried if they don’t make tough decision soon they could default on their debts.
Investors are dumping the Euro and pouring money into the US Dollar.
As we mentioned in the past, a falling dollar drives commodity prices higher. Now the dollar is climbing and that means commodity prices should keep drifting lower (at least in the short term)… and that includes gold.
With the price of gold falling, so does the value of AEM’s proven reserves. And it’s also going to cut into AEM’s revenue on gold sales.
The bottom line is, as long as the Euro Zone debt fears persist, the future for gold over the next few months is bleak.
On the technical side, AEM look like it’s set up for a slide too.
Over the last five months, AEM has set three lower lows and four lower highs. This is a confirmed downtrend. And to make matters worse (or better for our puts), AEM recently dropped through its 200-day moving average. Then it tried to rally and was turned back again.
All signs point toward continued weakness in gold and AEM. Let’s take advantage of the problems in Europe and buy puts on a gold producer set to fall over the next few months.
Trade Details:
| Underlying Stock Symbol: | AEM |
| Current Bid-Ask Price: | $2.68 – $2.73 |
| Option “Buy Up To” Price: | $2.95 |
| Break-Even On Stock At Expiration: | $42.05 |
| Maximum Risk Per Contract: | $295 |
Exit Strategy:
AEM is trading at $50.83 per share. Resistance levels will be at $55 and again at $60. Remember, we want this stock to move lower. Support levels will be at $45 and $42. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.
Chart:
Category: EOT Trade Alert
