MINDENAO GOLD MINING (fka MDGM)

[Alex Chory]

morning bart, interesting article on Silver and a

good point if I may say so, sounds like a plan...

I'll be keeping an eye out for that Silver ETF, I think that would be an excellent addition to the portfolio.



just fwiw

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Maximizing Profits With Silver Options Trading

By Ben Abelson
09 Feb 2006 at 01:51 PM EST


NEW YORK (ResourceInvestor.com) -- As news of gold's 25-year highs makes its way into major financial publications, and major brokerage houses finally begin to recommend gold stocks to their clients, it appears that gold may be on its way to becoming mainstream. But even as the yellow metal begins to gain investor acceptance once again, interest in silver and major silver stocks has been seriously lagging that of gold.

While silver equities have begun to move higher, most of the larger, better-known companies still trade at levels at or below those of two years ago. In fact, among major silver producers, only institutional favorites Pan American Silver [Nasdaq:PAAS; TSX:PAA] and Silver Wheaton [AMEX:SLW; TSX:SLW] have generated any significant returns for investors over their previous highs. Other major silver stocks, such as Hecla Mining [NYSE:HL], Coeur d'Alene [NYSE:CDE; TSX:CDM], Silver Standard [Nasdaq:SSRI; TSX:SSO] and Apex Silver [AMEX:SIL] are trading anywhere from 10%-40% below their cycle highs.




This fact is even more frustrating to silver investors given that major gold stocks like Goldcorp [NYSE:GG; TSX:G], Newmont Mining [NYSE:NEM], Agnico-Eagle Mines [NYSE:AEM; TSX:AEM] and Barrick Gold [NYSE:ABX; TSX:ABX] are all hitting major multi-year highs.

The silver market's general lack of liquidity and tight supply situation means that moves within the sector can be sudden and violent. While an ETF's listing is already partially factored into the price of silver, a definitive listing is likely to push the metal over $10/ounce. The net result: now may be a perfect time for silver speculators to work their way into some low-risk, high-reward bets.

(Note: Implementing and understanding this strategy does require an intermediate knowledge of options trading, as well as a brokerage account enabled for both buying and selling options.)

Silver Options

One of the best ways to speculate on silver is to buy some cheap, medium-term options on some of the most undervalued, most volatile (more likely to give you that pop!) silver equities. By using what option traders call a long calendar spread, nimble investors can actually work their way into a bullish position with no expense (less commissions). One of the best ways to initiate this position right now, for example, would be with some cheap calls on Hecla Mining.

(Yes, Hecla has a Venezuelan discount. But in both absolute and relative terms it looks quite cheap and should move quite strongly with an appreciating price of silver. Witness the stock's recent pop from $4 to above $5.)

For example, an investor could purchase 10 September 7.5 calls on Hecla. With a current contract price of about 45 cents, the total cost of this trade would be $450, plus commissions. With this purchase, the investor would have entered the first leg of a calendar spread. The ultimate goal would be to cover the all or part of the cost of the call purchase through the sale of calls with an earlier expiration date.

With some decent short-term price appreciation in Hecla, an investor could then sell 10 Jun 7.5 calls on Hecla for the same price of 45 cents - recouping his entire $450 initial investment, less commissions. Given Hecla's current volatility, a 15% rise in the stock's share price (certainly not unthinkable with a silver ETF listing) within the next several weeks could bring the Jun 7.5 calls into this price range.

The Situation

If one successfully enters into both halves of the trade, the investor would be considered long a June 7.5-September 7.5 call calendar spread at no cost, less commissions. This spread allows an investor to participate considerably in Hecla's upside, without any principal risk.

Let's review how this spread could play out based on several different trading situations. The core things to remember are that options are valued not just on the underlying stock price, but also on the time until their expiration and on the underlying stock's volatility (among other factors).

One Month to Expiration

It's mid-May, 30 days until expiration of the June 7.5 calls. Let's take a look at what our calendar spread would be doing with Hecla trading at several different price levels.

Hecla at $5

With Hecla at $5 in mid-May, and volatility levels the same as today, the June 7.5 calls would be essentially worthless, while the September 7.5 calls would be worth 25 cents, according to our options pricing calculator. An investor could opt to buy back the June 7.5 calls for 5 cents - spending a total of $50 for the 10 contracts - so as to hold the September 7.5 calls 'free and clear.' The investor could then sell the September calls, or wait and see if the underlying stock went up (making the calls worth more). Alternatively, an investor could wait around until expiration, hoping that the June 7.5 calls expired worthless (which would likely happen and would save the $50), and then possibly sell the September 7.5 calls.

Hecla at $6.50

With Hecla at $6.50 in mid-May, and volatility levels the same as today, the June 7.5 calls would be worth about 20 cents, while the September 7.5 calls would be worth about 70 cents. The investor could close out their position by buying back the 10 June 7.5 calls for $200 and selling the 10 September 7.5 calls for $700 - capturing a profit of $500. Of course, the investor could also let their position ride a little longer.

Hecla at $8

Well, it's not likely, but we wouldn't complain if this happened! With Hecla at $8 in mid-May, and volatility levels the same as today, the June 7.5 calls would be worth about 90 cents, while the September 7.5 calls would be worth about $1.55. The investor could close out their position by buying back the 10 June 7.5 calls for $900 and selling the 10 September 7.5 calls for $1,550 - capturing a profit of $650. Of course, the investor could also let their position ride a little longer, and hope that Hecla's share price stayed in the $7.50 range, so as to capture a higher profit on the spread (see below examples).

At June Expiration

It's June 16, and the June 7.5 calls are due to expire at the end of the day. Let's review how our options would be priced.

Hecla Trading Below $7.50

Unless Hecla's stock is trading well below $7.50, you probably wouldn't wait until expiration day to resolve your spread. But, if this is the case, there's no need for an investor to buy back the calls - and he could allow them to expire worthless.

The only danger, however, would be if Hecla's stock shot suddenly over $7.50 at the end of the day. As we all know, selling 10 June 7.5 calls means that the investor has sold someone the right to purchase 1,000 shares of Hecla at $7.50. If the person to whom these options were sold decided to exercise the calls, the investor would have to deliver the shares (and would then find themselves short 1,000 shares of stock at $7.50).

While this could be easily resolved by closing out the short sale on the following Monday morning, it's a hassle that we probably wouldn't want to deal with. If this looks at all likely, investors would do well to buy back the options for 5 cents per contract (for a total expense of $50) and save themselves this problem. The investor would still own the September 7.5 calls almost free and clear - having paid for them with the $450 earned from selling the June 7.5 calls - and could decide when to sell out of these on their own time.

The ideal, profit-maximizing situation would be for Hecla to expire just below $7.50 - at $7.45, say. This would mean that the June 7.5 calls would expire worthless (so the investor wouldn't have to buy them back), but the value of the September 7.5 calls would be maximized - to the tune of about $1.05, giving the investor a clear profit of $1,050. At this point, the investor could either sell out of the options, or press their luck and hold on.

Hecla Trading Above $7.50

If Hecla's above $7.50 on expiration day, the investor would have to buy back the June 7.5 (unless they wanted to be short 1,000 shares!) and could simultaneously sell the September calls to lock in a profit. For example, if Hecla was trading at $8, the investor would have to buy back the June 7.5 calls for 50 cents each (or $500 total), but could sell the September 7.5 calls for $1.40 each ($1,400 total), locking in a total profit of $900, less commissions.

The Potential Problem

Of course, if it were this simple, everyone would be doing it. The biggest problem with this situation is that calendar spreads aren't always the easiest to work into. If Hecla doesn't rise in the medium term, an investor wouldn't be able to sell the June 7.5 calls for 45 cents to cover their initial investment. Depending on what happens with the underlying stock, the investor could then opt to sell the June calls for a lower price (covering only part of his initial principal).

For example, if the investor sold the June 7.5 calls for 35 cents ($350), the investor would have risked a total of $100 on his position ($450 spent to buy September 7.5 calls, plus $350 earned from selling the June 7.5 calls). Alternatively, if Hecla stays flat or declines, the investor might not be able to sell the June 7.5 calls for any appreciable amount and would just stay speculatively long the September calls.

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Conclusion

For investors recognizing the relative undervalution of silver stocks, the trading of cheap options can provide the means to secure decent profits without risking significant principal. Investors who aren't familiar with options trading are encouraged to do their homework before attempting these trades. Those uncomfortable trading in Hecla options (given its political risk) can just as easily try this strategy with Coeur D'Alene's options of a similar expiration month - which are comparably inexpensive.
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