Thursday, January 24, 2013

SA: Canadian gold

Update: SA crossed above it's 10-day price channel at $13.96, closing the bear position opened on Jan. 24. The initial position produced an 11.7% profit. 

Two out of the three companies that made the cut in today's analysis are miners.

This morning I rejected a trade in BVN, which came up on my higher volume stocks list, because of an illiquid options grid.

My second mining choice comes from the less liquid pool of exchange-traded stocks.

Seabridge Gold Inc. (SA) broke below its 20-day price channel on Wednesday, piercing the boundary at $16.81, and then continued to drop today, the fourth day of the decline.

SA's bearish breakouts over the last four years have been profitable, with an average gain of 10.2%. the 75% success rate gives an adjusted yield of 7.6% for each trade.

Like most stocks in the precious metals sector, SA has been on a decline since mid-2010, when it peaked at $37.95.

The most recent pattern on the weekly chart appears to be a developing very long term triangle, with a base running from $12.20 to $20.34. Figuring the breakout levels on triangles is more art than science, because of the ambiguities in drawing trendlines, but somewhere between $15 and $16 seems to be a fairly accurate zone for the downside triangle boundary.

Seabridge, based in Toronto, Ontario, concentrates on developing new Canadian gold fields, Once their ready for production, Seabridge either sells its interest or works out a joint venture. No one can forecast the next hot field, so Seabridge is in an inherently high-risk business with huge potential rewards but also significant potential losses.

SA lacks sufficient analyst coverage to calculate an enthusiasm index. The few analysts paying attention are bullish, an opinion not borne out by the financials, which have some dismal points.

Return on equity is a negative 6.7%, although the company has no long-term debt. Ten of the last 11 quarters have shown losses, and the one winner was back in 2011 at an earnings per share level so minuscule that it doesn't even show up by the third decimal point.

Institutions own only 38% of shares, and no price to sales ratio can be calculated since the company has never reported any sales.

And yet, SA has an outstanding selection of option strike prices with open interest running to the three- and four-figures, with front-month at-the-money puts showing a 8% spread. These are options that I could trade, which is fairly amazing, given that SA's average volume is 245,000 shares a day.

Implied volatility stands at 37%, the low point of the six-month range, and has been falling since the start of the year.

Options are pricing in confidence that 68.2% of trades will fall between $14.17 and $17.57 over the next month, for a potential gain or loss of 10.7%, and between $15.06 and $16.68 over the next week.

Put options today are trading 50% above their five-day average volume, and puts are 231% above average volume.

The fair-price zone on today's 30-minute chart runs from $16.01 to $16.29, encompassing 68.9% of transactions surrounding the most-traded price, $16.22. With about three hours left before the close, SA is trading slightly below the zone.

Seabridge last reported earnings on Nov. 14 and I can't find any info on when the next quarterly report will be out. Three months from the last is Feb. 14, and if that's the date, then SA is within my exclusionary rule that bars trades within 30 days of an earnings announcement.

And that's a major problem with trading foreign companies, even those of our Canadian cousins. No country requires as much information about corporations as the U.S. does, and that makes it easy for traders.

Decision for my account: I opened a bear position on SA, despite the ambiguity about the earnings date. The risk of an earnings surprise is to the downside, the direction of the trade.

For further protection, I've structured it as a bear call spread expiring Feb. 16, short the $16 calls and long the $18 calls. This gives a break-even point of $16.42, providing a 3.5% cushion.

If the price continues to fall, I'll add to the position by buying long puts expiring in May with deltas as close to 70 as I can manage.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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