Firming quotes for gold and silver in recent days have filled our sails, allowing us to spread off the risk in bullish options positions we hold in two issues popular with Rick’s Picks subscribers – Silver Wheaton (SLW) and the Gold Miners ETF (GDX). A while back, we bought calls in both with the intention of later shorting options of an earlier expiration against them. However, with precious metal prices relatively flat for a spell, there were no good opportunities to do so. Yesterday, however, GDX extended a strong rally far enough that we were able to short June 45 calls against some June 43 calls we already held. We had paid an average 1.75 apiece for the latter, implying that we could have lost as much as $175 per option with GDX trading below 43 when the options expire on June 19.  But by shorting June 45 calls for 1.20, we were able to cut that risk by more than two-thirds, effectively legging into a $2 vertical bull spread for 0.55 that is trading in-the-money. That means the most we can lose is $55 per spread, and the most we can gain is $200 – a risk:reward ratio of nearly 1:3.  Our maximum gain would come with GDX trading anywhere above 45; it settled yesterday ay 43.01 and looks feisty enough to continue higher in the weeks ahead.

In Silver Wheaton, we still need a little more price movement to get filled on our hedge order. For some time, we have held four September 10 calls with a cost basis of  0.69.  Those calls could be sold yesterday for as much as 1.50, but our goal is to milk even more profit from them by shorting June, July and August calls against them successively in the coming months. Our still-open order seeks to short June 10 calls for 0.70, and if we’re successful we would effectively own the September 10 calls for nothing.  Thereafter, we should like to see Silver Wheaton stock selling for around $10 when our September 10 calls expire in four months. By then, we could have taken in as much as 2.80 in premium from the short sale of calls against via a “rolling” calendar spread. That would be four times what we paid for our September 10s, yielding a theoretical profit of more than $200 per spread. If we are able to short just the June calls for 0.70 today or next week, our theoretical risk will have been reduced almost to zero.

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