Investors have greeted the surprising U.S.-Iran peace deal with a sizable move higher, especially for high-powered tech stocks. However, with so many names enjoying blistering upside, there’s a rational case for seeking out less-heralded enterprises. One such example may be gold exploration and mining specialist Iamgold (IAG).
Here’s the quick fundamental case. If we are to take the implications of the peace agreement at face value (and assuming lingering geopolitical tensions don’t roil the relative calm), the Trump administration made some shocking concessions. It’s not just that the U.S. returned to the baseline before the bombs started dropping; rather, the nation fell back into a less favorable circumstance.
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Basically, the Strait of Hormuz was an international waterway under international law but became a flashpoint during the conflict. Following an agreed-upon interim period, the memorandum of understanding suggests that Iran and Oman may introduce service fees. In essence, the waterway may fall under Iranian jurisdiction.
That has major implications for IAG stock because of the potential paradigm shift in monetary policy. While the dollar may be backed by the good faith and credit of the U.S., in reality, the Navy provides the muscle of the bond market.
The implicit bargain is as follows: the U.S. guarantees freedom of navigation, the world prices commodities in dollars and America gets to run deficits that would bankrupt any other nation. Now, the credibility of this petrodollar is under serious question, which forces nations to store alternative assets, including gold.
With the U.S. giving up a key component of its hegemony, gold should start looking very interesting again. That should make IAG stock quite compelling, especially with shares losing 31% of value since late February of this year.
Volatility Skew Reveals an Intriguing Play for IAG Stock
It’s one thing if I was the lone voice randomly pushing for Iamgold stock; it may be another if options traders also believe that a brewing catalyst is in the works. That’s where the volatility skew provides critical intel for those considering a bullish position.
By definition, the volatility skew showcases implied volatility (IV) across the pricing spectrum of an options chain. It’s best to frame this indicator as an insurance marketplace. Because higher IV indicates greater breadth of potential movement, a strong reading suggests higher variance risk. As such, an incentive exists for traders to protect themselves against unexpected swings by hedging the implied move.
Through the skew, retail traders can gain a better understanding of how the smart money is positioned. In the case of IAG stock, the overall posture is protected bullishness. Generally speaking for mature equities, you would expect put IV to be greater than call IV across the pricing spectrum, as the concern mainly centers on downside protection. What’s interesting about Iamgold is that this protective posture (for the July 17 expiration date) is concentrated in the lower strike prices.
Stated differently, smart money traders aren’t anticipating severe volatility. However, because of the uncertainty of the geopolitical environment, there is a need to have some coverage for “in case stuff happens.” Nevertheless, the primary takeaway is that traders want exposure to upside convexity, as evidenced by rising call IV as the strike price increases.
Without getting bogged down by complex jargon, the skew suggests that traders want protection from disaster — but they also want leverage in case IAG stock rises higher. Of course, just because the smart money is positioned for upside convexity doesn’t mean that this upside will come. Still, if there was genuinely no belief in a possible upward surge, it wouldn’t make sense for these traders to pay the heightened premium.
Inductive Reasoning Could Be the Tell
One quantitative factor that stood out to me is that IAG stock is coming off a period of slowed momentum, at least when looking at its recent candlestick chart. In the past 10 weeks, IAG printed only three up weeks. Using the presupposition of technical mean reversion theory, Iamgold could be due for a rebound — provided of course that there’s a catalyst in tow.
Fundamentally, I believe that the catalyst is the weakened petrodollar that incentives accumulation of alternative assets. Further, from an inductive standpoint (using data from 2023 onward), whenever IAG stock has only printed three up weeks in a 10-week period, shares tend to rise roughly 8% on average over the next four weeks.
For those seeking a short-term risk, this inductive observation makes the 18/19 bull call spread expiring July 17 intriguing. With an above-average spark — something that’s possible given the current dynamic circumstances — IAG stock could potentially trigger the $19 strike at expiration. If so, the maximum payout for this trade stands at over 122%.
Plus, with a net debit of $45 per spread, the nominal risk is limited. It’s something to think about as everyone else dives into crowded trades.
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. This article was originally published on Barchart.com
