I would imagine that very few people love to engage obvious trades. One of the most obvious investment categories right now is gold. With tensions in the Middle East escalating due to Israel’s strike on Iran — and concerns that the U.S. could be dragged into the conflict — the gold market has witnessed noticeable inflows. As such, the mining sector has been a beneficiary. Still, Iamgold (IAG) could be an intriguing prospect despite having already gained significantly.
Like many other mining plays, IAG stock has been a top performer so far this year. Since the January opener, IAG has gained nearly 41% of equity value. Over the past 52 weeks, the security has almost doubled in value. At the same time, Iamgold incurred a bit of a corrective spell this week. Against Monday’s opening volley, IAG is down roughly 4%. This could be a modest discount.
From a heuristic perspective, IAG stock could be forming a modified bullish pennant formation. In April, the security popped higher but has since charted a series of lower highs. On the other end of the scale, IAG has been forming a series of rising lows. At the culmination of this consolidating phase — or so technical analysts may argue — a breakout may occur.
Potentially, the above setup could represent the catalyst for IAG stock to swing higher, perhaps marching toward the psychologically important $10 level. With the supporting fundamentals, along with a Moderate Buy consensus rating among Wall Street analysts, Iamgold certainly looks intriguing.
Statistical Framework May Favor the Bulls for IAG Stock
As intriguing as the technical and fundamental backdrop is for IAG stock, it lacks in providing a timeframe for action. Of course, no one can predict with absolute certainty the utter chaos of the financial ecosystem. Nevertheless, attempting to find a guidepost in the sand comes down to interpretive practices, which are not reliable.
Especially for options traders, they require a probabilistic framework. With investing, the focus tends to be on the “why” of the target asset or enterprise. With trading, market participants zero in on the “how” — how much, how fast, how likely. After all, options expire, so a thesis must be accurate in magnitude (y-axis) and in time (x-axis) to be profitable. Otherwise, the entire principal (or worse) is at risk.
Still, calculating probabilities isn’t as easy as it sounds in finance because of the non-stationarity problem. In both the technical and fundamental approach, the measurement metric — whether that’s share price or a valuation ratio — changes (often dramatically) over time and context. To conduct a meaningful statistical analysis requires that the dataset speak a unified language.
Subsequently, one way to impose stationarity on financial data is to convert price action into market breadth — sequences of accumulative and distributive sessions. Doing so creates a binary language (with the rare exception of flat sessions) of first-order principles, meaning that they cannot be mathematically reduced. As such, this consistent language can be categorized and quantified temporally, allowing for conditionally probabilistic analysis (as opposed to derivative).
Right now, IAG stock is on pace to print a 6-4-U sequence by this Friday: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Notably, in 54.12% of cases, the following week’s price action results in upside, with a median return of 5.17%.
In contrast, the baseline upside probability for IAG stock on any given week is 51.37%. That’s a derivative probability, a statistical calculation taken over the entire dataset distribution. However, the 6-4-U sequence is a conditional probability, one that gives the bullish speculator a modest edge.
An Aggressive Call Spread to Consider
For those who want to roll the dice on IAG stock, the 7/8 bull call spread expiring July 18 may be intriguing. This transaction involves buying the $7 call and simultaneously selling the $8 call, for a net debit paid of $50. Should IAG stock rise through the short strike price ($8) at expiration, the maximum reward is also $50, a payout of 100%.
To be sure, this is a risky trade. On Wednesday, IAG stock closed at $7.27. Afterhours trading indicates that the security could open around $7.32 on Thursday. If so, traders would be looking at IAG hitting around $7.70 in short order, within a week or two. From there, the bulls will need to maintain control of the market to give it that push toward $8.
It does help that the above trade features a time-of-writing breakeven price of $7.50. Still, investors will need some motivation to provide that extra impetus. It’s possible, then, that the turmoil in the Middle East could offer that cynical catalyst.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
