Are “Silver Strikes” 36X Better than Dividends?

Sleuthing Christian DeHaemer's teaser for this "one illegal technique"

By Travis Johnson, Stock Gumshoe, March 6, 2013

Almost every ad that refers to options in some oblique and secret way likes to throw in the fact that this is now a sector that is “regulated by the U.S. Government” … but it it “used to be illegal.”

Which makes it sound both more exciting, and safer, than it is really is for most individual investors.

So yes, Christian DeHaemer’s new ad, for his Options Trading Pit (that’s the newsletter that used to be helmed by Ian Cooper) is touting some sort of silver-related options trade.

I have written about DeHaemer’s teases many times over the years, for several different newsletters he has run, but he’s never particularly been touted as an “options trader” guy — he’s known to me as a frontier markets risk investor, someone who looks for the big potential, high risk stocks that we’re not supposed to have heard of. And he has certainly picked some doozies over the years, including Africa Oil back in 2011 before they struck oil in Kenya on their first try and shot up 500% (it’s come back down a bit since, I own those shares personally).

So now he’s pitching an options trading idea that he calls “Silver Strikes.” What is it?

Well, he hints around that he’s got three silver strikes to recommend … but doesn’t actually provide any clues about what they are, specifically — other than the fact that they each trade for around a dollar.

So I probably can’t name the specific trade he’s touting, but I can give you the general idea and some possible examples.

DeHaemer calls his “system” for finding picks the “hammer, trigger, and spark” system — that basically means a stock has been “hammered” down, the stock recovers a bit in a “trigger” move but then declines again after that, and then something sets off a “spark” to send the stock back past that trigger point and higher. Which looks good when he shows the charts of a few stocks this has worked for — but you can, of course, come up with a historical chart that shows anything you want it to show.

He also clearly thinks silver is going to shoot higher in 2013 — a common assertion among the investing punditocracy and a sentiment I’ve heard trumpeted loudly from most of the newsletter families over the last three or four months (particularly for Stansberry and the rest of the Agoraplex, which also includes DeHaemer’s employer Angel Publishing). Not everyone’s on board with Eric Sprott in predicting $100 silver, but there are a lot of folks who think silver is going to snap higher — whether because the “manipulation” of the silver futures markets will be unwound or just because investor demand has ramped so much higher over the last two years and recovering industrial demand will mean supply just can’t keep pace.

(The manipulation story comes from the assertion that JP Morgan and other banks are shorting heavily to keep silver prices down, perhaps in collusion with the government or, depending on who you ask, the Trilateral Commission or the Illuminati or whatever other bogeyman you can imagine — yes, I know at least part of that story of futures manipulation is likely to be true, I just don’t know if there’s really a deep conspiracy or if said manipulation will end or has ended).

Here’s DeHaemer’s take on the shiny stuff:

“As Silver Demand Blows Through the Roof…
‘Silver Strikes’ Gains Will Be Explosive

“You don’t have to be tuned in to the latest financial news to understand that silver demand is absolutely off the charts.

“Couple that with the fact that supply is historically low, and you find yourself in a situation where silver prices can do nothing but explode.”

And you can easily build a case for this story of outsize silver demand as the calendar turned to 2013 — investors were snapping up silver coins faster than the mint could make them, so the U.S. Mint did briefly have to halt and ration the sales of American Eagle coins (those are the basic 1 oz bullion coins that the mint is required by law to mint and sell — not the fancier collectible versions that they often have to halt sale of if bullion coin demand is high, since both collectible and bullion coins use the same silver “blanks”). January 2013 set a new record for silver coin sales by the mint, and that’s after several years during which silver coin demand has been far, far higher than we’ve seen for decades. That rising demand coincided with the move in the silver price from the $10-15 range up to the $30+ range over the last five years or so — though the investor interest really spiked in the Spring of 2011, when silver shot up to almost $50 for a very brief few moments. Silver and gold have performed similarly over the last five years, and their prices have reacted to the same stimuli most of the time, but silver has been far, far more volatile.

And whenever you have the potential for high volatility, you have folks looking at options as a way to capitalize on those big moves.

So we’re told that DeHaemer’s “alerts” are triggering buys that could get you 35X your money by June on these “silvers strikes.” Here’s how they put it:

“In the case of these now-legal ‘Silver Strikes,’ his alerts have already been going off like crazy.

“You may know there was a massive silver sell-off in 2009 during the market correction… Well, that’s the hammer.

“You might also be abreast of the fact that silver started moving up in 2010 due to QE1 and 2. That was the trigger.

“But here’s where the real action begins…

“As I showed you earlier, silver demand is reaching critical levels. Production is slowing due to this increased demand.

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“Things are hitting a fevered pitch, and the spark is set to send silver to unprecedented levels — giving savvy investors access to potential paydays the likes of which they’ve only ever read about in financial success books.”

I have no idea whether there’s really a “spark” in the silver markets right now — like gold, silver recently had what some folks call a “death cross” on their charts, when the 50-day moving average dips below the 200-day moving average, and both of those moving averages are declining for silver, so a lot of technicians are nervous about that. I’m not a technician and I’m not particularly worried about gold or silver in the long run (I expect them to hold their value over time against declining currencies, which is why I hold physical gold and silver as part of my savings), but that doesn’t necessarily mean I’m putting on a big options trade to bet that silver is going to climb substantially higher over the next three months.

But if you wanted to do so, what would you do? Well, DeHaemer says he has three recommended “Silver Strikes” trades that provide leverage. As we’ve said, these are options — here’s how he describes them:

“But instead of scrambling around with everyone else, trying to hoard physical silver, you could instead take advantage of “Silver Strikes.”

“Not only are there limitless ‘Silver Strikes’ to take advantage of; lots of them cost right around $1. That’s right. For just a buck, you can take advantage of this silver bonanza without paying the hefty premiums placed on silver coins and bullion.

“That’s because as prices shift in the silver market, $1 ‘Silver Strikes’ move at an exponentially higher rate.”

I don’t know if there’s something magical in the $1 options prices, other than that it sounds good — perhaps they’re just taking their cue from the extremely popular “Silver Shots” teaser at that their colleagues at Insiders Strategy Group (then Taipan) ran a few years ago that similarly touted $1 several-month-out options trades on the silver ETF.

But we don’t receive any other clues as to which “silver strikes” DeHaemer is pitching. So I guess he doesn’t want to dance with the Thinkolator … which means we’ll just have to provide a couple guesses to give you an idea of how it might work.

If you’re an active options trader and know the mechanics of options trading, you can just skip to the end and share your thoughts with a comment about where silver might be going, or how you’d want to play that trend in the stock or options markets — I’m going to explain the basics of an options trade such as they’re hinting at with the “Silver Strikes.”

First, I’ll assume that he’s pitching options on an ETF — that gives you the best chance of tracking the silver price pretty well, or, in the case of the silver miners ETF, of getting some leverage to silver without much single-mine risk. And there is always mine-specific risk — miners have a tendency to hit cost overruns or miss their schedule about as often as I’m late getting the kids out of the house in the morning. Which is to say, “enough to be embarrassing.”

It sounds like the pitch he’s making is a very basic one, just buying call options to speculate that the underlying stock or ETF will rise in value. We’ll assume that the most liquid silver ETF, SLV, is one of his targets.

SLV is trading at almost exactly $28 right now, and it does have options contracts available for June that expire on June 21.

A call option gives you the right (but not the obligation) to buy a security anytime before the option contract expires, at the strike price set in the contract. Call options are priced by the share, so a $1 call option would mean you’re paying $1 per share for that option to buy the stock, but each standard options contract that trades is 100 shares, so when you talk about a $1 option you’re actually talking about a option contract that’s currently changing hands at $100 and that gives the right to buy 100 shares at the contracted price. Most of the options you might consider to be potential “silver strikes” won’t pay dividends, but options contracts are generally NOT adjusted for dividend payments unless the dividend is particularly large or special (a big 20% one-time dividend or a spinoff or split would almost certainly lead to the options contract being adjusted to compensate, normal payments on a typical 1-8% yielding stock don’t impact the options contracts, part of the reason why high-yielding picks often have relatively inexpensive options).

If we go out to June for SLV options, there are lots of pretty liquid options contracts, with at least 1,000 contracts of open interest, and in increments of 50 cents per share … so there’s a lot of flexibility. One possibility would be the SLV June 29 call options, which are priced at just under a dollar.

The SLV $29 options are at 90 cents right now, which would mean that you’re effectively betting that SLV will rise to $30 ($29 plus 90 cents, plus commissions) between now and June 21 for you to break even. SLV tracks the price of silver quite precisely, it’s been roughly a dollar below silver recently (to account for the expenses of the fund … and perhaps, to a very limited degree, the preference some investors have for more of a “guaranteed physical silver” ETF), so you’re betting silver goes to $31 an ounce or above.

The possible scenarios? Well, if the SLV ETF stays about where it is for the next three and a half months your options contract gradually becomes worthless — the right to buy SLV for $29 means nothing when you can buy it on the open market at $28, and the time value (the right to buy it not just today, but until late June) declines as the amount of time left before expiration declines. If SLV is below $29 when your options contract expires, your options contract is worth nothing — that doesn’t mean you mightn’t have had the opportunity to sell it inbetween now and the expiration date, perhaps at a better price depending on what happens to SLV, but if you hold to expiration the price has to be above $29 on June 21 for the options contract to have any value.

If the underlying SLV ETF is above $29 and you don’t sell the option, your broker in many cases (check with them) will automatically exercise the option for you if you have the money to buy the stock at $29, so do pay attention if you trade options — you might end up owning the stock even if you hadn’t wanted to. You can always sell the options contract, which should be easy if it’s in the money, but with most brokers you have to proactively do so.

In the short term, the options contract price will react very quickly to relatively small swings in the price of silver — so if SLV falls to $26.50 tomorrow, a drop of 4-5% or so, the bids for that options contract would probably drop to 40 cents or so, losing half their value or more. You can’t easily use any “stop loss” techniques on very volatile, near-the-money options like these, even if they’re pretty liquid as the SLV options are — they’re just too bouncy.

So if the SLV shares are below $29 and are generally lackluster over the next few months, this turns into a stinky trade. But the point of making this trade is that you think silver is about to spike in value — so what happens if you’re right?

Well, that’s when you get the adrenaline rush of a hugely profitable trade.

If silver goes back to the spiking highs it hit in 2011, let’s say the shares of SLV hit $45. You have the right to buy SLV at $29, so suddenly that right — which you paid 90 cents for — is worth at least $15. That’s a gain of 1,500% or so, and if you’re like me getting a gain like that once every couple years is enough excitement to keep you dabbling in the options markets, where you will lose most of the time on speculative bets like this.

SLV has mostly been in a range of roughly $26-33 over the past year, so let’s say it just goes to $33 again and is around that price at expiration — that would mean your options contract is now worth about $4, and you paid 90 cents, so that’s a nice 300% gain. Also probably enough to get you excited.

That’s the basic premise then, that you think silver will take a bit run in the next 15 weeks or so, and that you’re willing to bet on that run happening before June 21. Being right about the fact that silver is in demand and undervalued and a good store of value and a bulwark against potential inflation and an increasingly in-demand industrial metal isn’t enough … that can all be true, and it can be realized as silver climbs over the next 18 months to reflect those big picture things, but if you’re not pretty precisely correct about when that silver price rises you could easily be right about the long-term potential but still lose all your money by betting that the potential is realized within a specific time frame. As you might imagine, getting more time for your options bet costs more money — so the same option for January 2014 would cost you a bit over $2, for example, and going further out to January 2015 would cost you more than $3.50.

The same basic picture will play out in any of the likely candidates for “silver strikes”, though the premium will likely be larger for individual mining stocks because they’re more volatile. Betting on a 10% rise in Silver Wheaton (SLW), the silver streaming company, would cost you about $1.15 (that’s the June $34 SLW call, which also has a decent amount of liquidity for small speculators) — that’s appealing because SLW tends to be a leveraged play on silver, usually moving in sympathy with the silver price but with more volatility than SLV.

Similarly, another “Silver Strike” potential might be the silver miners ETF (SIL) — that one actually has very little options trading volume, so it’s probably not a candidate for DeHaemer’s subscribers because they’d run the contracts up in price just by breathing on them, but speculating that this ETF of larger silver mining stocks would go up from $18 to $20 by July (different contract expiration month) would cost you about 75 cents. If you want to get into specific silver mining stocks, a few of the larger ones that tend to have at least some options trading liquidity are Coeur d’Alene Mines (CDE), Pan American Silver (PAAS), Hecla Mining (HM) or First Majestic Silver (AG).

Likewise, there are other silver-linked ETFs where you can rummage around looking for a silver gem of an options contract to dabble in — there’s the leveraged ETF that’s supposed to move twice as much as silver on any given day, ProShares Ultra Silver (AGQ), for example.

So there you have it — no clues for the Thinkolator about specifically which picks DeHaemer is targeting for his “Silver Strike” short term options trades to benefit from silver rising quickly during the Spring. My guesses, and these are just guesses, would be that he’s picking the SLV option I noted above (or one close to it, like $28.50), and the Silver Wheaton June calls in the $33-36 range, and the Pan American Silver July $16 calls.

But those are absolutely wild guesses — the point is, yes, you can speculate on silver rising more than 10% in the next few months, you can do so pretty easily and with a relatively small cash outlay, and if you’re right you can generate some very quick profits on these kinds of leveraged speculations. If you’re wrong, of course, the odds are that you’d lose most or all of your investment — your specific bet rests on a very specific point in time and a specific price, so there’s not a lot of middle ground where you would break even or generate a small loss or gain. Except it’s not really right to say that speculating on the move of a commodity over a 15-week period is an “investment,” so we’ll say that you’d lose most or all of your bet. The nice thing about buying options (as opposed to selling them) is that you know up front exactly how much you can lose … you can lose all of the money you spent to buy the options contract, but no more.

So … what do you think? Will silver be spiking up over the next three months? Six months? Two years? Will we be retesting those all time highs near $50, or going back to the teens? I accumulate a little bit of silver and gold every month as part of my savings plan, and I do have some mining exposure, particularly through gold royalty and streaming companies that I consider to be my long-term gold-levered equity holdings, but I don’t have any idea what gold or silver will do between now and the summer.

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