There’s a lot of fear brewing in the macroeconomic framework and this has been a cynical boon for gold stocks, particularly the alpha players like Barrick Gold (GOLD). On a year-to-date basis, Barrick saw its equity value skyrocket nearly 33%. If the past five sessions are anything to go by given the 20.41% return, GOLD stock may have plenty left in the tank.
Sure, it’s always possible to have too much of a good thing. At the same time, the dramatic rise in the yellow metal appears to be fueled by true fundamentals; namely, the fear of inflation ripping away at the real value of the dollar. As Barchart’s Andrew Hecht pointed out early this month, gold should exceed its inflation-adjusted 1980 high of over $3,300 per ounce.
Personally, I don’t see any reason why this wouldn’t be the case. The caveat that Hecht mentioned is that the road to $3,300-plus will likely include speed bumps. That’s why it’s good to be bullish but with some margin of safety built into the trade.
Fortunately, astute speculators have a compelling opportunity on their hands with risk-inverted GOLD stock call spreads. By risk inversion, I’m referring to debit-based transactions — particularly vertical spreads — which feature core characteristics of credit-based strategies. To put it simply, risk inversion allows traders to have their cake and eat it too.
In the case of GOLD stock, there are certain bull call spreads that, upon entering the transaction, are already in the money. In this situation, theta (or time decay) works in favor of the debit buyer. Normally, buying a debit puts you at odds with theta because for each passing day, there is less time for your position to be profitable.
With certain call spreads of GOLD stock, you already start off winning on paper, inverting the normal risk profile.
GOLD Stock Pops on Unusual Options Activity
Thanks to the remarkable lift in GOLD stock on Friday — gaining just over 7% — the equity also ranked among the most unusual stock options volume indicator. Specifically, total options volume hit 216,559 contracts against an open interest reading of 1,296,589 contracts. This metric represented a 260.92% lift over the trailing one-month volume.
Notably, call volume significantly outpaced put volume, 177,123 contracts to 39,436 contracts, yielding a put/call volume ratio of 0.22. At first glance, this metric implies significant bullish activity. Options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — reflected a more nuanced picture. Still, net trade sentiment landed at $123,000, slightly favoring the bulls.
What’s intriguing is that within the options flow, the majority of calls were for in-the-money (ITM) or near ITM calls with close expiration dates, some ranging from this coming week (April 17) to mid-May. If I were to take a guess, I’d imagine that these calls represent measured upside wagers.
And that right there provides the incentive or motivation to consider doing the same with risk-inverted call spreads. Undeniably, the spreads with a payout of 100% or more capture the eye. At the same time, they’re less likely to be successful.
With plays based on risk inversion, you dramatically improve your odds of success while being rewarded fairly robustly. Case in point is the 20/20.50 bull call spread for the options chain expiring April 17, 2025.
The above transaction involves buying the $20 call at a time-of-writing ask of $93 and simultaneously selling the $20.50 call at a bid of $58, resulting in a net debit paid of $35. Should GOLD hit the short strike price at expiration (which is on Thursday, not Good Friday), the maximum payout is 42.86%.
The thing is that at $20.59, GOLD stock is already profitable on paper. What’s more, there’s no countervailing trade on the bear put spread side. So, if GOLD stays flat or falls slightly, the call spread would still be eligible for the maximum payout.
Easy Math Helps Drive the Decision
What’s more, GOLD stock — at least in the context of the aforementioned call spread — is empirically underpriced in favor of the speculator. This is not an argument based on forward projections, which come down to opinions.
Based on the entire weekly pricing history of GOLD stock, the odds of any given week ending positively sit at 49.3%, which isn’t great. However, the 20/20.50 bull call spread features a gap to breakeven of 1.17%. In other words, we’re not looking for the odds that GOLD will move up; rather, we’re seeking the odds that it will move up more than 1.17% loss.
By that framework, the odds of long success rise to 59.35%. That’s significant because the profit of probability — or the market makers’ view of the odds — is 57.2%. No, it’s not the biggest mispricing but it is relatively undervalued.
If you’re looking for a quick, high-probability trade, GOLD stock could be enticing.
