Quick Scalp Alert: New Gold (NGD) Offers a Speculative Wager

By Josh Enomoto

• As a precious metals miner, New Gold (NGD) seems wildly risky in a high-interest-rate ecosystem.

• Nevertheless, options dynamics essentially has runners in scoring positions.

• Big money inflows have the chance of scaring the bears away from NGD stock.

At a cursory glance, Canadian precious metals miner New Gold (NYSEAMERICAN:NGD) seems an awfully risky proposition amid basic monetary policy headwinds. 

With the Federal Reserve committed to tackling stubbornly high inflation, the subsequent sharp rise in interest rates has largely hurt commodities. Still, speculators in the derivatives market appear to have taken a liking to NGD stock.

To be 100% clear, there’s little to suggest that New Gold has the right internal fundamentals to rise above the muck. Yes, investors may be able to point to its second-quarter revenue haul of $184.4 million, up over 59% against the year-ago tally. However, on a trailing-12-month (TTM) basis, New Gold is tracking to print $700 million.

While significantly up from 2022’s haul of $604.4 million, it’s down conspicuously from 2021’s tally of $745.5 million. Not coincidentally, that year also saw other high-risk asset classes – particularly cryptocurrencies – skyrocket based on the Fed’s prior easy-money policy.

Moving forward, the money will no longer be easy, posing broad challenges for NGD stock and its ilk. Nevertheless, options traders appear very enthusiastic about its speculative upside prospect.

Rolling the Dice on NGD Stock

Most recently, options flow data tracked by Fintel – which screens for big block trades likely made by institutions – reveals that a major trader (or traders) acquired 3,006 contracts of the Oct 20 ’23 1.00 Call. Primarily, we have a clue that this volume represents a sudden surge in demand due to the open interest print at the time. With only 178 contracts open, the smart money appears aggressively optimistic on this transaction.

InvestWrite Review EFT Bits: NGD

• Largest ETF Holding: Global X Gold Explorers ETF (GOEX), 1.72%

• YTD Performance vs. ETF: NGD +6.1% vs. GOEX -16%

But that’s not the only factor bringing a positive spotlight on NGD stock. Back in April, institutional traders bought 20,014 contracts of the Jan 19 ’24 1.50 Call. For this transaction, the speculators paid a total premium of $559,970. Per Fintel, this figure represented 4.62 standard deviations above the mean. Interestingly, about a month earlier, traders also bought 10,000 contracts of this very call option.

Enticingly for current opportunists, history shows that during the time the traders bought the $1.50 calls – March 23 and April 11 – NGD stock rose sharply, eventually hitting a 52-week closing high on May 10 (at $1.47). Since then, NGD has printed much red ink.

However, with the apparent renewed interest in NGD calls, both options traders and open market gamblers should keep their eye on New Gold for a possible quick scalp.

Panic Could Materialize in New Gold

What also makes NGD stock enticing from a contrarian angle is that on the opposite side of the fence, there are several speculators that don’t have much hope for New Gold. And they’re putting their money where their mouth is, writing (selling) the call options that the bulls love.

Specifically, on June 7, countervailing entities wrote 40,024 contracts of the Jan 19 ’24 1.50 Call. By that time, open interest had soared to 45,870 contracts. Notably, the (seemingly) bearish entities received a premium of $320,000 for their risk exposure.

To be sure, it’s a huge risk. While buying options gives the holder the right but not the obligation to exercise the contract, options writers conversely have the obligation but not the right to fulfill the contract (assuming it’s exercised). 

So, if NGD stock rises materially above the $1.50 mark, you could see mitigatory countermeasures.

Said countermeasures could involve buying puts (instead of selling them) to close the liability. Presumably, though, said action should lift NGD stock.

Adding fuel to the fire, TipRanks shows that the consensus view of NGD stock stands as a moderate buy. The average price target? $1.64.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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