On Jan. 14 on StreetAuthority's sister site
ProfitableTrading.com, I wrote
: "Gold and silver prices have taken a dive in the past two and a
half years. Silver prices have been cut in half since their 2011
highs, while gold 'only' shed about a third of its value since
then. Currently, silver is trading around $20 an ounce, and gold
is trading at about $1,250 an ounce."#-ad_banner-#
Well, not much has changed in the past two weeks. Prices are
slightly lower with silver at $19.70 an ounce and gold at
One company that is shielded from these fluctuations in prices
Silver Wheaton Corp. (NYSE:
. Based in Vancouver, British Columbia, the company basically
secures long-term purchasing agreements associated with silver
and gold around the globe at a fixed price.
Currently, it has more than 20 agreements associated with 23
mines. This allows the company to pay dividends on a regular
basis without worrying too much about fluctuations in metal
As an example, Silver Wheaton agreed to purchase 25% of all
the silver produced by
at a mine in Mexico at $3.90 per ounce (remember that silver is
currently at $19.70 an ounce), along with an upfront cash payment
of $485 million. That's an estimated 7 million ounces per year
for the next 22 years. And it has similar agreements with the
Below is a chart of SLW with a black line representing the
Market Vectors Gold Miners ETF (NYSE:
. As you can see, SLW has closely tracked this popular mining
ETF, and both are above their 50-day moving averages.
On the fundamental side, its trailing price-to-earnings (P/E)
ratio of 17 is in line with the SPDR S&P 500 (
). Margins are very healthy with a gross margin of 64%, operating
margin (after direct operational expenses) of 60%, and profit
margin of 56%.
The company has only 27 employees, so labor costs are not an
issue. Additionally, since SLW does not operate any of the mines
and simply has purchasing agreements with them, capital and
mining costs are also not an issue.
Even if silver and gold prices stay where they are, SLW should
make money. Gold would have to drop 68% before it would
negatively affect SLW, and silver would have to drop more than
70%. And if metal prices go up, SLW will make even more money,
which should be reflected in the share price.
SLW pays a $0.36 annual dividend for a current yield of 1.6%.
But we can turbocharge the income on this stock with a
covered call strategy
is an option to buy or sell shares at an agreed upon price (the
strike price) within a certain period of time. The buyer of a
call option purchases the right but not the obligation to buy the
shares at the strike price.
The seller of a call option (also known as the writer) sells
the right to the buyer for a payment known as a
. In doing so, the seller assumes the obligation to deliver the
shares at the agreed upon price should the buyer choose to
exercise her or his right.
With SLW trading at about $22 per share at the time of this
writing, we can buy 100 shares and simultaneously sell a February
call option with a $22 strike price, which is currently trading
for about $0.80 and expires on Feb. 22.
Since we receive $0.80 for selling the call, our net cost is
lowered to $21.20 per share. To give you some wiggle room, I like
this trade at a net cost of $21.25 or less.
Here's how this covered call trade could work out:
If the shares stay above the $22 strike price, the buyer will
buy the shares from us at $22, giving us a gain of at least $0.75
per share, or 3.5% in 23 days. This works out to a 56% per-year
rate of return.
If SLW trades lower, we would not experience a loss unless it
falls below our net cost of $21.25 or lower, giving us a cushion
of more than 3% at current levels.
If SLW is below $22 on the third Friday of February, then the
call option will expire worthless. We then have the ability to
sell another call option against the shares to generate more
income and lower our cost basis further.
So, using a covered call strategy allows you to generate
income as you wait for more upside in SLW while protecting
yourself on the downside.
This article originally appeared on ProfitableTrading.com:
Income Traders Have a Shot at 56% a Year With
This Silver Play