Market Insights

Gold Fields has been surging along with bullion, and yesterday someone took a position with options.

This large transaction occurred less than an hour into Monday’s session as the South African miner pushed above $19:

• 8,000 March 18 puts traded for $0.55.
• 8,000 March 17 puts traded for $0.30.
• Volume was more than 4 times open interest in both strikes, which indicates new positions were opened.

There are two potential explanations behind the activity.

One possibility is that an investor sold the March 18 puts and sold the March 17s. That would create credit spread, letting him or her collect $0.25. The resulting position would expire worthless if GFI stays above $18 through expiration.

Alternately, the trader may have purchased the March 18 puts and sold the March 17s to create a bearish vertical spread. That would have cost $0.25. The resulting position could generate profit of 300 percent from the stock declining 14 percent by expiration.

Gold Fields (GFI), daily chart, with select patterns and indicators.

Puts: Not Always Bearish

Puts tend to gain value when stocks decline because they fix the price where a security can be sold. However they can be combined in ways that aren’t always bearish.

For example, selling a put credit spread reflects a belief downside is limited. The investor would be willing to accept an initial credit in return for agreeing to buy shares between $17 and $18.

Alternately, the purchase of a vertical spread may indicate the investor wants to hedge a long position in the shares and keep holding them.

GFI rose 4.7 percent to $19.56, its highest closing price since 2006. The stock has advanced about 50 percent since late December, following gains in the broader gold-mining industry. Management said in November it may divest smaller mines. On January 15, J.P. Morgan raised its price target from $17.10 to $18.80.

Monday’s put spread pushed overall option volume in the company to 8 times greater than average in the last month, according to TradeStation data.

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