The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, April 17, 2007
Email – # 367
** Add a Silver Lining to Your Portfolio
Silver prices are on a tear. One of the best proxies for silver prices are the shares of silver companies. The top pure play that I follow is Silver Wheaton (NYSE: SLW), which is trading near its all-time highs – hardly surprising, considering silver is trading in the mid-teens per ounce.
But that is not the recommendation today. Silver Wheaton does not offer LEAPS. And why buy a company near its highs when other opportunities in the same sector exist that are not even close to trading at the same high valuations?
Today’s pick is Coeur D’Alene Mines (NYSE: CDE).
CDE is not a top tier company, but it is a low-cost producer that is growing its production and reserves. It is trading about 50% below the highs it achieved the last time silver was at its current levels. And for the first time in recent memory, shares are actually trading at reasonable levels from a fundamental standpoint.
A big issue with CDE is that some of its mines are not located in the most stable regions in the world. Even though it’s just a couple, it’s enough of an issue for some investors to shy away from this company despite the fact that its production and profits have been growing each year.
Last year, the company was able to increase production substantially, make $.30 cents per share and record a cost per ounce of less than $3. This year, the company expects to increase production at double-digit rates. The current earnings estimates are in the mid $0.30 to $0.40 level, giving it a price to earnings ratio of around 12 – quite a wonder for a resource stock.
We are going to take an added measure of safety with CDE. Of course, this is all predicated on silver remaining above $9 per ounce for the near term – the price is currently above $13.50 per ounce.
Here’s what you should do:
Buy the Coeur D’Alene Mines (NYSE: CDE) January 2009 $2.50 call LEAPS (ZYB-AZ). The current price of these LEAPS is $2.15 on the offer. The current share price is $4.17. This deep-in the-money option will protect your downside and cost you $0.48 cents net to be in this position at current prices.
Of course, these numbers will change as the share price changes. But, with a deep-in-the-money, high-delta option, you get two benefits: First, you get close to dollar-for-dollar movement in the option, in relation to the share price. Second, if the share price stays in the current range or even goes down a little, the damage to the option price should be minimal (unless we get a massive collapse in the price of silver).
Buy the call LEAPS (ZYB-AZ) at current levels of $2.15 – pay no more than $2.20. This will give us a close-to-two-year call option on silver prices at a very low cost. If CDE reaches its 52-week highs of $7.30 within the next couple of years, we could see an easy double or triple.
Karim
Current Portfolio:
Company / Symbol: Coeur D’Alene (NYSE: CDE)
Option / Symbol: Jan. 09 $2.50 call (ZYB AZ)
Date Purchased: 4/17/07
Current Price: $2.15
Comment: Buy.
Company / Symbol: General Motors (NYSE: GM)
Option / Symbol: Jan. 08 $27.50 put (WGM MY)
Date Purchased: 3/13/07
Current Price: $2.25
Comment: Hold.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $40 put (WD MN)
Date Purchased: 11/27/06
Current Price: $0.85
Comment: Hold.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $48 call (YWZ AV)
Date Purchased: 11/27/06
Current Price: $1.95
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $1.61
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $13.01
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $2.60
Comment: Hold.
Company / Symbol: Advance Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $0.36
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Freeport (NYSE: FCX)
Option / Symbol: Jan. 09 $60 call (OMT AL)
Date Purchased: 3/5/07
Current Price: $20.50
Comment: Hold.
Company / Symbol: Freeport (NYSE: FCX)
Option / Symbol: Jan. 09 $70 call (OMT AN)
Date Purchased: 3/5/07
Current Price: $15.00
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $4.50
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $2.00
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $2.20
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $0.80
Comment: Hold. Sold call against January 08 $40 position.
