Thanks to the resurgence in the precious metals market, New Gold Inc (NYSEAMERICAN: NGD) is back to building on its blistering run. On a year-to-date basis, NGD stock has gained about 266%. Over the trailing five sessions, the security is up more than 10%, thereby showing little signs of buyer exhaustion. Indeed, a rare quantitative signal that flashed in New Gold’s price chart indicates that even more upside is possible.
Adding to the enthusiasm, New Gold is scheduled to release its earnings report on Feb. 18. In other words, the bullish thesis revolves around two factors: first, a positive print and outlook could easily boost NGD stock, which is already primed for robust kinetic swings. Second, the record-breaking rally of both gold and silver has resumed after a consolidatory lull. That may help ignite sentiment throughout the early part of the new year.
Of course, the bullishness toward NGD stock is complicated by a not-so-insignificant detail. In November, Coeur Mining, Inc. (NYSE:CDE) announced that it would acquire New Gold in an all-stock transaction valued at approximately $7 billion. It should be noted that the exchange ratio values NGD at $8.51 per share. Therefore, the current price represents roughly an 8% premium over implied value.
To be sure, some investors might view this as too rich a premium ahead of the anticipated closure of the deal, which may occur in the first half of next year, pending shareholder, court and regulatory approvals. However, what’s important to keep in mind is implied volatility (IV). As a residual value backed out from actual traded prices — which themselves stem from real money order flows — IV offers a big clue to the expected dispersion of the target security.
For the February earnings disclosure, expected move calculators are anticipating a 19.1% move in either direction for NGD stock. Now, we just need to narrow down the possible outcomes to make a trade.
Exposing The Risk Geometry Of NGD Stock
To be clear, expected move calculators are useful because they provide an expected dispersion based on real speculative and hedging activities of options traders. However, dispersion does not equate to probability. By plugging the IV into the Black-Scholes formula, you can reverse engineer the expected scale of price movement. However, it does not tell you which outcomes are more likely to materialize.
Now, there is a “probability of profit” metric that is also derived from Black-Scholes. However, this is not a “real” probability because Black-Scholes uses a mathematical formula that assumes (forces) a risk-neutral paradigm. But because the stock market is one of the most complex environments ever encountered, this assumption of risk neutrality cannot be assumed.
In order to find the likelihood of outcomes, we must develop a non-parametric distributional model. For example, if we took a single 10-week strand of NGD stock, the return during this period won’t tell us anything about the performance probability of the other weeks in the dataset. However, if we stacked hundreds of rolling 10-week sequences in a fixed-time distribution, the most frequent behaviors would create a bulge in probability mass.
This bulge is risk geometry, which shows the accelerative emotions of buyer sentiment. More importantly, it also shows the transition where buyers are tempted to become sellers.
Using this hierarchical framework, the forward 10-week returns of NGD stock can be arranged as a distributional curve, with outcomes ranging between $8.80 and $10 (assuming an anchor price of $9.16). Further, price clustering would likely occur around $9.30.
The above assessment aggregates rolling trials since January 2019. However, we’re interested in isolating for the current quant signal, which is the rare 4-6-U sequence. In the past 10 weeks, NGD stock printed only four up weeks, yet the overall slope trended upward. This dynamic tells us that even though the bears numerically outnumbered the bulls, the price kept moving higher.
Under this scenario, prices would be expected to range between $7.80 and $12.40, which is quite similar to the expected dispersion calculated from IV. However, we also know that probability density would be thickest at around $10.
Going For The Big Trade
Based on the market intelligence above, the smart move may seem to be to target the $10 strike price. Indeed, the 9/10 bull call spread expiring Feb. 20, 2026, allows you to do just that. If NGD stock rises through the second-leg strike ($10) at expiration, the maximum payout only be about 43%. That’s not the greatest reward that you can extract from the options market.
Moreover, because of the highly anticipated earnings disclosure — combined with precious metals momentum heading into the new year — there’s a possibility that NGD stock can outperform its usual baseline behavioral state. That’s what IV is indicating and more importantly, the 4-6-U quant signal justifies a more bullish posture.
As such, I would take a long look at the 9/11 bull call spread expiring Feb. 20, 2026. This trade requires NGD stock to rise through $11 at expiration, which is an ambitious target. However, doing so would extract a maximum payout of roughly 111%.
Plus, the breakeven price lands at $9.95, which sits right on the thickest part of probability density. Therefore, you would have a solid chance of not losing money while stretching for a big payout. In other words, this trade helps maximize profitability potential while limiting opportunity costs.
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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