As the price of silver goes, so goes Silver Wheaton (SLW), and the price of silver has been down for the last several months and is currently flirting around $26 per ounce. Silver Wheaton is in the silver mining related business, but doesn't actually own any mines. The company purchases silver interest in other mining companies for which silver is a by-product of the company's primary mining object.
Silver Wheaton buys the silver at a very low price, typically $4/oz, and then sells the silver at current market prices. With the current market price for silver around $26/oz, Silver Wheaton makes a very handsome profit. While Silver Wheaton's Price-to-Earnings ratio of 16 is in a comfortable range, the company's Price-to-Sales ratio of 13 is very expensive and reflects the high perception of the company's future prospects. Silver Wheaton's stock price pretty much mirrors the price movement of silver, as illustrated by Silver Wheaton's stock price being down for the year and appearing to put in a base at the $26 range as shown below:
Investing in mining companies is a good way to indirectly invest in metal commodities like silver or gold, but doing so can be fraught with danger, as the price of the commodities can fluctuate violently. As described in a previous article, the price of silver is at a very high price when considered in a historical context. With the high volatility of metal commodity prices and the elevated prices of commodities, an investor considering mining related companies for investment should think about bounding a loss using options.
In a previous article for Silver Wheaton, posted on June 12, 2012, a protected covered call or collar for July 2012 option expiration was considered for the company in which the collar had a potential return of 4.2% (38% annualized) and a maximum loss of 7.3%. A protected covered call may be entered by selling a call option against a stock and using some of the proceeds from selling the call option to purchase a put option which functions to protect or "insure" the position. A long stock position in Silver Wheaton entered on June 12, 2012 would have experienced a loss of -1.9% at option expiration in July of 2012. However, the protected covered call position mentioned in the previous article would have returned +2.2%. So even though the price of the stock declined, the protected covered call returned a profit of +2.2%.
Using PowerOptions tools, a variety of protected covered call positions are available for Silver Wheat for December of 2012 as shown below:
After taking into consideration Silver Wheaton's dividend payment, the second position in the table is interesting, as a risk reward ratio of 1:1 can almost be achieved, which is attractive. Taking into the company's expected dividend payments, the potential return of the second position is 3.9% (9.4% annualized) with a maximum potential loss of 4.4%, so even if the stock price drops to zero, the maximum potential loss is 4.4%. The specific call option to sell is the 2012 Dec 25 at $2.91 and the put option to purchase is the 2012 Dec 23 at $1.87. A profit/loss graph for one contract of the Silver Wheaton protected covered call position is shown below:
For a stock price below the $23 strike price of the put option, the value of the protected covered call remains unchanged. If the stock price increases to around $30, the position can most likely be rolled in order to realize additional potential return.