Surfing the Trend in Silver Wheaton

We occasionally recommend option trades designed so that even the village idiot could hope to make money on them. These minutely detailed “Pick of the Day” selections are intended to make back one’s annual subscription cost at the very least, but also to help traders get over whatever trauma they may have suffered trying to profit with puts and calls. This is quite a feat, even for us — and we’ve been at it for more than 35 years. Truth to tell, it takes every trick we’ve learned over that time to string together a few easy winners. Our approach is not hit-or-miss, and we shun the common practice of putting out many recommendations in hopes that perhaps one or two will hit.  We’d rather that every trade make money, even if we’ve fallen short of that goal in practice. Our approach emphasizes quality over quantity, and this means “Pick of the Day” trades are offered only when an opportunity looks unbeatable. (If you don’t subscribe but would like to verify for yourself how well these trades have fared, we would encourage you to take a risk-free seven-day trial to Rick’s Picks by clicking here. That will give you access to a chat room where you can query the subscribers themselves.)

silver-wheaton-small

An current example is a trade we’ve got on in Silver Wheaton, a favorite in the Rick’s Picks chat room because the stock offers a direct play on silver.  The trade is being done in three stages because we have found that it is very nearly impossible to make money using simple, directional trades in which one buys, say, a call option in anticipation of a rally in the underlying stock. We have never met a trader who has made money over time using this tactic. Here’s the way we do it instead:  1) Buy the call option when the stock falls to a targeted low.  We did this in Silver Wheaton last week, buying sixteen December 12.50 calls for an average 0.45 apiece when the stock briefly turned weak. Then, 2) yesterday, when Silver Wheaton rallied sharply, we sold half (8) of the calls for 0.75.  This reduced our cost basis for the eight calls that remain to 0.15. (Our unrealized gain is $560, since the options settled at 0.80 yesterday.) Finally, 3) we will try to short eight December 15 calls if and when they reach a price of 0.45. (They closed yesterday at 0.30 bid). If successful, we will have legged into the December 12.50-15.00  vertical call spread at no cost. That means we would have zero risk and the potential to make $2000 if Silver Wheaton is trading $15 or higher come December 18, when the options expire.

 Pros Hold the Aces, But…

The key idea here is that, with options, a buy-and-hold strategy almost never succeeds. Option positions have to be “worked,” and the best way we’ve found to do this is by buying options when they are cheap, then short-selling other options against them when they are at the moment of their juiciest ripeness. To accomplish this, we use Hidden Pivot targets to predict precise swing points in the price of the underlying stock. This is our “edge” when we attempt to beat professional option traders who otherwise enjoy innumerable advantages over the retail customer. The pros may hold all of the aces, but that still leaves us with 48 other cards to work with.

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Comments on this entry are closed.

Chemical September 3, 2009, 1:12 am

You ought to just hold SLW — forget the trading — as it is the best stock on the board. $100 within the next two years. I know, I know, Rick. I’ll shut up now …

John Smith September 3, 2009, 1:38 am

We occasionally recommend option trades designed so that even the village idiot could hope to make money on them. These minutely detailed “Pick of the Day”
Have you bought anymore MSFT OCT 13.00 puts lately they are really cheap. Thanks for that tip of the day.

&&&&

I’ve yet to meet a whiner who succeeded at trading, John. But if it will make you feel better I’d be happy to share your pain. RA

Chris September 3, 2009, 6:39 am

Rick, a quick question:

What is the advantage of going long one call, and thenlocking in a given spread via shorting another call, versus “locking-in” the spread by going long on puts instead?

Is it that in the latter scenario, one is long twice, and can thus get screwed twice by the pro”s?
I always thought the latter scenario would be a good one in cases of low implied volatility, where the loss on one is mitigated, and the gain in the other is increased when i.v. rises during larger underlying moves. ((that may just be retail customer theory, which the pros have long beaten. What do i know…)

I’m still wating for someone to start offering straight options on the VIX.
:)

Thanks!
Thanks.

&&&&&

The spreads I prefer are intended to provide a highly leveraged shot at big profits, but without horrendous time decay. This is especially useful if we expect a stock to rise over a period of several months. We also seek to take advantage of fleeting spikes that goose option volatilities to the moon. If, for instance, SLW opens on a gap this morning, we may have a chance to short Dec 15 calls when they are hugely overvalued — sell them, perhaps, for even more than the 0.45 we’d intended. And, of course, we will do so with the expectation that the stock will be strong in the coming months, but not so strong that the December 15 calls will go in-the-money. We may also decide to exercise our December 12.50s, a step in building a long-term position. RA

CPF September 3, 2009, 1:34 pm

Hello RA, Having missed the initial SLW strategy, is there a way to play this entering at this time?

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The easy opportunity in SLW is unfortunately past, CP. The good news is that there will always be another opportunity — in this stock and in many others. Stay tuned! RA

Rich September 3, 2009, 2:22 pm

ZSL above 6.21 looks like a good deflation trade…

&&&&&

ProShares UltraShort Silver vehicle has plummeted in 2009 with Silver’s rise. From a high of around $27 late last year, it is currently trading at 5.93, slightly off today’s all-time low of 5.82. I wouldn’t try bottom-fishing until ZSL reaches 5.25, a Hidden Pivot target that is my minimum price objective for the moment. The target implies that more strength lies ahead for Silver over the short-term, at least. RA

Rich September 3, 2009, 10:09 pm

Thanks for the insight Rick.
Buy stops better MOC.



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