Seeking Alpha
Profile| Send Message|
( followers)  

This strategy not only provides you with the opportunity to leverage your position in Silver Wheaton (NYSE:SLW), but it also provides a chance to get into the stock at a much lower price. This technique should only be employed if you are bullish on the long-term prospects of this stock.

Suggested strategy for Silver Wheaton Corporation :

This play has two parts to it. The first part entails selling a put. In the second part, calls are purchased with the proceeds from part 1.

Part 1

(click images to enlarge)

This stock is still in a downtrend and trying to put in a bottom in the $22-$23 ranges. Generally, the lows have to be retested, and they need to hold for a bottom to be in place. In this case, the stock needs to trade down to the $22.00-23.00 ranges on lower volume, and then bounce off for a bottom to take hold. On an intra-day basis, it could trade below these levels, but as long as it does not close below $22.94 on a weekly basis, the outlook will remain neutral. A close above $28 will turn the intermediate outlook to bullish.

The Jan 2013, 23 puts are trading in the $2.00- $2.04 ranges. A pullback to the stated ranges should push these options to trade roughly in the $2.80-$3.20 ranges. For this example, we will assume that we can sell the puts for $2.80.

Part 2

The Jan 2013, 30 calls are trading in the $1.63-$1.67 ranges. If the stock pulls back to the above stated ranges, these options should trade in the $0.80-$0.95 ranges. For this example, we will assume that we can purchase these calls for $0.90 or better if the stock trades in the $22.00- $23.00 ranges.

The proceeds from part 1 will be used to fund the purchase of these calls. Individuals will be able to purchase up to three calls and still have a net credit of $10.00.

Benefits of this strategy

You have an opportunity to significantly leverage your position in this stock for almost free. We use the words almost free because hardly anyone is fully invested in the markets all the time. Thus, the money sitting in your account is dead money, as the interest rates offered today are pathetic. So one could argue that the money being used to secure the puts is not a real cost, as it was not being used anyway. The money will only be used if the shares are put to you (assigned to your account).

Thus if you are bullish on the stock, this would be a good way to significantly boost your rate of return for little to no cost. If, on the other hand, you were going to use this money on another play and decided instead to use it here, then it would make sense to count the money used to secure the puts as part of your cost. With this strategy, you have the ability to control 300 shares for each put you sell.

If the stock trades below the strike price at which you sold the puts, the shares could be put to your account. Depending on the number of calls you purchased, your cost per share could range from $28.10 (if you purchased one call only) to $29.90 (if you purchased 3 calls).

Risk factors

If you put this strategy to use just because you were enticed by the potential gains, then the risk factor could be significant, as the stock could trade well below the strike price and the shares could be put into your account.

If, on the other hand, you were bullish on this stock and were ready to purchase it, then this strategy provides you a way to get into the stock at a lower price and also gives you the option to significantly leverage your position. If the stock takes off, you could walk away with some handsome gains. The leverage part of this trade is free, as you are paying for it with the proceeds from the sale of the puts.

Company: Silver Wheaton

Brief Overview

  1. Short Ratio = 1.3
  2. Cash Flow 5-year Average = 0.62
  3. Profit Margin = 74%
  4. Quarterly Revenue Growth = 26.20%
  5. Quarterly Earnings Growth = 20.5%
  6. Operating Cash Flow = $663 million
  7. Beta = 1.36
  8. Levered Free Cash Flow = 353.38 million
  9. 5 year EPS growth rate 39.8%
  10. 5 year sales growth rate 39%
  11. Sales vs 1 year ago = 72.4%
  12. Long term debt to equity = 0.02

Growth

  1. Net Income ($mil) 12/2011 = 550
  2. Net Income ($mil) 12/2010 = 290
  3. Net Income ($mil) 12/2009 = 118
  4. Net Income ($mil) 12/2008 = 18
  5. Net Income Reported Quarterly ($mil) = 147
  6. EBITDA ($mil) 12/2011 = 616
  7. EBITDA ($mil) 12/2010 = 334
  8. EBITDA ($mil) 12/2009 = 159
  9. Cash Flow ($/share) 12/2011 = 1.72
  10. Cash Flow ($/share) 12/2010 = 1
  11. Cash Flow ($/share) 12/2009 = 0.47
  12. Sales ($mil) 12/2011 = 730
  13. Sales ($mil) 12/2010 = 423
  14. Sales ($mil) 12/2009 = 239
  15. Annual EPS before NRI 12/2007 = 0.37
  16. Annual EPS before NRI 12/2002 = 0.33
  17. Annual EPS before NRI 12/2009 = 0.38
  18. Annual EPS before NRI 12/2010 = 0.83
  19. Annual EPS before NRI 12/2011 = 1.55

Dividend history

  1. Dividend Yield = 1.4
  2. Dividend Yield 5 Year Average = 0.12

Dividend sustainability

  1. Payout Ratio = 0.09
  2. 3. Payout Ratio 5 Year Average = 0.03

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 22.99
  2. ROE 5 Year Average = 13.09
  3. Current Ratio = 5.03
  4. Current Ratio 5 Year Average = 2.99
  5. Quick Ratio = 5.03
  6. Cash Ratio = 5.01
  7. Retention rate = 91%

Conclusion

Only investors who are bullish on this stock should put this strategy into play, as there is a chance that the shares could be assigned to your account if the stock trades below the strike price. This usually takes place on the expiration day, as most option players are in the game to make money, not to force the seller of the option to purchase the shares. Additionally, consider taking profits if the calls show gains in the 75%-100% ranges. You would do this by selling the calls and buying back the puts.

Investors looking for other ideas might find this article interesting: Procter & Gamble: More Than Double Your Current Yield or an entry of $59.30.

Disclaimer

It is imperative that you do your due diligence, then determine if the above strategy fits your risk tolerance levels. The Latin maxim "caveat emptor" -- let the buyer beware -- applies.

Source: Silver Wheaton: 3-1 Leverage For Little To No Cost