Franco Nevada (FNV) – Is it Time to Start Looking at Gold Stocks Again?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Back in August, gold-related stocks were in the headlines as many of them were surging with spot gold prices rallying to an all-time high. Often when a certain sector is getting a lot of attention, it’s worthwhile waiting for a pullback which is why it may be worthwhile revisiting FNV which has retreated 16% from its August high. The following article outlines why FNV’s upcoming earnings report could drive its stock price higher – Franco-Nevada (FNV) Earnings Expected to Grow: What to Know Ahead of Next Week’s Release. Also take a look at this article which discusses FNV’s advantage over its competitors as a result of its unique business model – Franco Nevada Corp (FNV) Has Risen 45% in Last One Year, Outperforms Market.

Technicals

FNV tested its 200-day moving average and the candlestick pattern that has materialized since then signals that a bullish reversal could take place. Looking at the broader picture, while FNV has declined notably from its August high there hasn’t been a lot of momentum in the downward move, especially over the past two months. A triangle pattern has emerged and a break of the upper line of the pattern, roughly around $140, would offer confirmation of a bullish breakout.

FNV Chart November 2020

If you agree there’s further upside ahead for FNV, consider this trade which relies on the stock remaining above the $135 level through the expiration in seven weeks.

Buy To Open FNV 18DEC20 130 Puts (FNV201218P130)
Sell To Open FNV 18DEC20 135 Puts (FNV201218P135) for a credit of $2.08 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when FNV was trading near $136.50.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $206.70. This reduces your buying power by $500 and makes your investment $293.30 ($500 – $206.70).  If FNV closes at any price above $135 on December 18, both options will expire worthless, and your return on the spread would be 70% ($206.70 / $293.30), or 544% annualized.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates October 31, 2020

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry