Market News

August 31, 2012  Fri 12:02 PM CT

Precious metals rallied today, and one investor is playing the sector with Franco-Nevada.

optionMONSTER's monitoring systems detected a surge of activity in the Toronto-based company, which hit a new all-time high above $51. The gains came after a statement from Federal Reserve Chairman Ben Bernanke suggested the central bank may inject more liquidity into the financial system.

That sparked a rally in gold and silver. Shortly after, a block of 2,000 FNV April 40 puts crossed our systems. While bearish when bought, these puts traded for $1.05 bid price, meaning they were sold.

The investor is now obligated to buy the stock for $40 -- but only if it drops to that level by expiration. If it doesn't, they'll keep the $1.05 and the puts will expire worthless.

The shares rose 3.68 percent to $51.25 in afternoon trading, and are up more than 20 percent in the last three months. Unlike most gold companies, FNV owns rights to properties and collects royalties. That reduces operational risks, and has let the stock outperform the broader group over the last year.

Selling puts is a common strategy when investors like a name but don't want to expend capital getting long. The 40 strike selected by today's trader is noteworthy because it's roughly the same level where FNV hit resistance in 2011 and then found support in May when the rest of the market tanked.

Overall option volume is almost 5 times greater than average in the name so far today.

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