Although the price action in bullion has been unusually violently since the world’s most feared terrorist was terminated on Sunday, we’ve been able to harness the swings in our favor without much stress. Yesterday, for instance, Silver Wheaton shares, a favorite with Rick’s Picks subscribers, finally hit a correction target at 36.35 that we’ve been focused on for more than a week. The stock has been up, down and all around in the meantime, but even when it was climbing steeply off a scary low, we’d warned that it was not yet out of the woods. That is still true, although we were able to take a nearly risk-free position just pennies off yesterday’s low.

We’d been expecting a tradable bottom at exactly 36.35, a Hidden Pivot support, and it was achieved in the opening minutes of yesterday’s session.  The swoon provided us with an opportunity to hedge a position we’d held for a while:  long 300 shares (or a multiple thereof) from 42.01 against three June 40 puts (or a multiple thereof) acquired for 2.35. Silver Wheaton shares can be extremely volatile, and that’s why we hedged them, buying puts when the stock was relatively strong.  The June puts gave us good downside protection, but it came at a price.  In effect, we were paying $235 to insure each round lot of stock till June 17 against a decline below $40 a share.

Fortunately, near the exact bottom of yesterday’s selloff, we were able to short three soon-to-expire May 38 puts against our June 40s for 2.85 apiece. This gave us a $2 vertical put spread – a bearish position – for a net credit of $50 per spread. Ordinarily, one pays money for such spreads rather than taking money in, and if you had bought the spread at yesterday’s closing prices you’d have paid $245 for it, buying June 40 puts for $510 apiece while selling May 38 puts for 2.65.  Instead, by legging into each side of the spread separately, and by timing our trades nicely, we were able to acquire the spread for even less than nothing, pocketing a theoretical $50 for each of three initiated.

Worst Case: A Small Profit

The implication is that the worst we can do on the spread, regardless of whether the stock goes up, down or sideways, is make a theoretical $50 per.  And even though spreading off the June 40 puts will negate our “insurance policy” if the stock gets sacked, SLW would need to be trading around $35 or lower before the effect kicks in.  Meanwhile, Rick’s Picks subscribers were also able to stake out a nearly riskless new position in the stock by buying shares at the expected 36.35 low.  In the actual event, SLW bounced sharply after bottoming at exactly 36.34.  Here’s the advice we put out via an intraday bulletin yesterday morning: “If you bought stock near the intraday low, take profits on half, since SLW has rallied $1.36 off the low.  That way, even if the stock relapses in a nasty way, as will always be possible, you can still come away with a profit.”

By day’s end SLW had indeed relapsed, although the so-far new low, 36.16, was not far beneath the first. But what do we care, having already booked a paper profit that effectively reduced our cost basis to $35? We are obliged to mention that past success is no guarantee of future profits, and that placing our bid a penny from the bottom of a $1.36 bounce could just as easily be attributed to dumb luck as to skill. However, if you believe skill was involved and would like to learn more about the Hidden Pivot method that we use to gain an edge whenever possible, click here for information about the upcoming webinar in late May – or here for a free week’s trial subscription to Rick’s Picks.

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