While the remarkable rise of gold and silver this year has dramatically elevated the underlying mining complex, the market is a cruelly chaotic and non-linear environment. As such, a steep correction was perhaps inevitable, something that Coeur Mining Inc (NYSE:CDE) is finding out the hard way. Since mid-October, CDE stock plunged about 26%. Still, the red ink could open up a contrarian opportunity.
In the retail investment market, it's not uncommon to witness people urging others to buy the dip. In an indirect manner, this sentiment aligns with the market's heteroskedastic behavior, which states that variance (volatility) is not constant over time. When applied to the equities arena, heteroskedasticity infers volatility clustering — periods of high volatility tend to follow high volatility and vice versa for quiet periods.
As such, we can infer that different market stimuli yield different market responses. Subsequently, if we can identify a specific stimulus, we can calculate — through the study of past analogs — the likely response over a given period of time.
Under Ashby's Law of Requisite Variety, a methodology cannot be materially less complex than the system it seeks to explain. To adequately analyze CDE stock or any other security, we need a robust framework, which is why I developed trinitarian geometry. This approach integrates probability theory (Kolmogorov), behavioral state transitions (Markov) and calculus (kernel density estimation or KDE) to uncover probability density, the point where stock prices tends to cluster given enough trials.
Of course, a security represents a singular journey across time so it doesn't naturally lend itself to probabilistic analysis. Therefore, a format change is required through reification and iteration. First, we treat probability not as an abstract concept but as a physical object, allowing us to visualize the shape and structure of risk. Second, we segment price action as multiple trials or sequences (in this case, sequences that are 10 weeks long).
At this point, we have the tools to begin a rigorous analysis of Coeur Mining.
Anticipating A Bounce In CDE Stock — But Playing It The Smart Way
With December rate cut odds rising, it's very possible that the Federal Reserve could implement a more dovish monetary policy. Indeed, the latest comments from key Fed officials suggest that the larger concern is tied to the cooling labor market, while inflation — as bad as it is for everyday consumers — is less of a drag, relatively speaking.
Because the market is now bullish on a rate cut, a cut itself may not boost CDE stock. However, additional dovish signals by policymakers could easily rejuvenate sentiment. The only problem is that it's incredibly difficult to use narratives to forecast shifts in market behavior.
For that, we need a quantitative approach. Using the aforementioned trinitarian geometry, the forward 10-week returns of CDE stock can be arranged as a distributional curve, with outcomes ranging between $16.25 and $16.87 (assuming an anchor price of $16.45). Further, price clustering would likely occur at $16.52.
The above assessment aggregates all trials since January 2019. However, we're interested in isolating for a specific signal, the 3-7-D sequence; that is, in the trailing 10 weeks, CDE stock printed three up weeks and seven down weeks, with an overall downward slope.
Following this setup, the forward 10-week returns are likely to range between $13.40 and $21. Moreover, price clustering would likely be predominant at around $16.80. To be fair, the positive variance is only 1.69%, which doesn't leave much room in terms of a structural arbitrage. However, the story doesn't quite end there.
When looking at the probabilistic mass of the 3-7-D sequence's forward returns, the "object" is heavier on the right side. Why does this matter? Because if probability were literally a physical object, it would more likely tip over on the bullish side than the bearish side.
In addition, if we were to buy future value, so to speak, we would buy the portion of the distributional curve that is likely to actually materialize. On the same token, if we were to sell future value, we would sell the portion that is less likely to occur.
That's the beauty of multi-leg options strategies.
Calculating An Effective Path For Trading Coeur Mining Options
While there's technically no upside limit to where a security can go, people generally have a rough idea of the realistic expectations of tradable assets based on prior trends and past experiences. What we're doing with a multi-leg strategy called the bull call spread is to buy the forward value that is most realistic and sell the premium associated with forward value that is unlikely to materialize.
In the case of CDE stock, I'd take a long look at the 15/20 bull spread expiring Jan. 16. For this spread to trigger the maximum (capped) payout of over 163%, CDE must rise through the second-leg strike ($20). That's awfully ambitious, as you can see in the 3-7-D sequence's distributional curve. However, the breakeven price sits at $16.90, which is contextually realistic given price clustering at $16.80.
In other words, with the 15/20 bull spread, we're buying forward value up to $16.90. Simultaneously, we're selling the rest of the premium from $16.90 to $20 under a credit-based transaction. Obviously, because the market prices lower (as in more realistically accessible) strikes at a higher premium, we end up paying a net debit. But so long as CDE stock reaches breakeven, we can get this debit back — and potentially extract big rewards.
Obviously, we win the most if CDE taps out at $20 at expiration. On the other hand, if the stock rises materially above $20, that becomes an opportunity cost as our credit contract ends at $20. However, the odds of CDE landing beyond $20 is minimal. As such, the calculus undergirding trinitarian geometry can be an incredibly powerful tool — something that no other retail methodology can currently match.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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