Monday, November 1, 2010

Silver at Decade Highs--Nearing $25 per Ounce

Have you noticed the price of silver lately?  It seems to be stealthily increasing and over the past month has markedly outperformed the price of gold.  I have especially noticed this because the price of Silver Wheaton stock (symbol SLW) which I own in my retirement account has gone nuts and has outperformed Goldcorp stock (symbol GG) by a wide margin.

To be perfectly honest, I haven't been paying much attention to the silver price and didn't even realize that it was approach the psychologically important $25 per ounce level.  I had simply noticed that SLW was increasing dramatically.  In fact, I have become worried that the stock has gotten ahead of itself so in the past week I bought some puts to protect my paper profits.

Silver is typically more volatile than gold so when the price of these precious metals begins to decline, I would expect silver to decline much more rapidly.  I don't know when that will occur but wanted to be able to protect myself with puts.  I also plan on allowing many of the calls that I have sold on SLW to be called out.  This will decrease my exposure to the silver price since I think it might be getting a little high in the short term.  Longer term I would expect that the fundamentals would argue for a higher silver and gold price.  But I want to take some profits now and buy back in again later.

I did this very effectively with Akamai stock (AKAM) using the collars that I trade.  I had purchased AKAM at various prices over the summer and had a net basis of $40 per share.  As it ran up, I decided to take the opportunity to purchase some $50 puts for October and lock in those profits.  As it turns out, AKAM was well below $50 per share so my puts were exercised allowing me $10 profit per share.  Then, I bought back the stock at two different price points below $50, namely $46 and $48.82.  The end result is that I now have the same number of shares that I owned before along with some extra cash.  I own puts on the stock and have sold some covered calls creating a collar.

My current basis in AKAM is $47.94 with the opportunity to be called out in 3 weeks at an average price of $50.25.  That would make for a one month profit of 4.8% should AKAM rise just a little farther to $52.50.  If not, I will sell some December calls to lower my basis some more.

The point is that I am doing the same thing with my SLW stock.  By owning the stock, I gain exposure to the silver price but have the flexibility of easily managing options to take advantage of the price swings and lock in profit using puts and collars.  My current basis in SLW is $24.15 per share overall with an average call strike price of $27.31 provided SLW is above $29 per share 3 weeks from now.  If not, I will sell calls on the shares I have left although I would expect some to get called out.

Anyway, this is just one example of using stocks to gain exposure to real assets.  I suspect real assets and the companies that deal in them will be a profitable investment for the next several years.  Until next time--KEEP IT REAL!

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