The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, March 27, 2006
#308
** A New Silver Spread With 4-to-1 Returns And Low Risk
Sliver prices are surging. The new ETF, more demand from emerging countries, new applications for silver in industrial production – you name it, silver is all the rage. Long considered the poor man’s gold, silver is also seeing strong retail demand. Friends of mine who sell silver (and other precious metals) for a living are crowing about the demand from “regular” investors.
While this may seem like the perfect backdrop for a fall in silver prices, it could also be the beginnings of a long-awaited bull market in silver. Right now, the metals sector is experiencing a strong bull-market. Gold, copper, zinc, platinum and silver are all trading at multi-decade highs. And this trend does not show any signs of abating.
So, how should we take advantage of the situation and profit by 4-to-1 if it happens, and minimize our losses… just in case this is not a full-on trend?
Of course, we will use LEAPS. And for additional zing, we will choose the company with both the highest leverage to silver… and LEAPS. It is not my favorite silver play; Silver Wheaton is. But, it will serve the same purpose if silver prices stay where they are or even stay above $7 to $8 per ounce.
The company is Coeur D’Alene mines (NYSE: CDE). CDE is not a low-cost producer, but at current silver prices, it does not have to be. It is a majority silver player in the Americas, with a little gold exposure tossed in as well. What makes CDE attractive is that it made money with silver in the $5 range – now that silver is worth twice that, it will be an earnings bonanza for this company.
Unfortunately, that is the problem as well. In the past, CDE has managed in the past to not deliver what was promised. This time we are not betting on management, but rather the Warren Buffett mantra, that business is so good, even inept managers should not be able to screw it up. As added insurance, we will risk a small amount by using a bull spread.
Here is what you should do.
Buy the CDE January 2008 $7.50 call options (LGZ AU) currently trading for $1.80 on the offer, and against these options, sell the like amount of CDE January 2008 $10 call options (LGZ-AB) currently biding $1.15.
Your net cost – the amount at risk if we hold this play to fruition will be $0.65 (1.80 minus 1.15). Our upside is the spread $2.50. Our return is almost 300% on this trade or 4-to-1. Execute this trade as long as you can achieve a net cost of $0.75 or better. That is your maximum risk per spread if we hold to fruition.
We may exit this trade early if silver shoots higher.
